Index Number as per the syllabus of MBA

1. Index Number
By:
Dr. Parveen Vashisth
Assistant Professor
CDLU Sirsa

2. Index Number:
An Index Number may be described as a
specialized average designed to measure the
change in level of phenomenon with respect to
time, geographic location or other
characteristics such as income etc.
E.g.: we say that index number of wholesale
prices is 125 for the period Jan 2022 compared
to Jan 2021, it means there is 25% increase from
last year to now.

3. Characteristics of Index Number:
A. These are specialized Average.
B. It measures the change in level of
phenomenon
C. It measures the effect of change over a
period of time.
Uses of Index Number:
A. They help in framing suitable policies.
B. They reveal (disclose) trends & tendencies.
C. Useful in deflating.

4. Problems in constructing Index Numbers:
1. Purpose of Index.
2. Availability & Comparability of Data
3. Selection of base period
I. The base period should be normal one.
II. It not be too distant to the past
III. Fixed base or chain base
4. Selection of number of items
5. Price Quotation
6. Choice of an average
7. Selection of appropriate weight
8. Selection of appropriate formula

5. Classification of Index Number:
Methods of Constructing Index Numbers
1. Price 2. Quantity
3. Value 4. Special Purpose
Index Numbers
Unweighted
Simple
Aggregative
Simple
Average of
Price Relative
Weighted
Weighted
Aggregative
Weighted
Average of
Price Relative

6. Unweighted Index Number:
Simple Aggregative Method:
When using of this method, total of current year prices
for the various commodities in question is divided by
total of base year prices and the quotient is multiplied
by 100.
P₀₁ =
∑𝑝₁
∑𝑝₀
X 100
∑𝑝₁= Total of current year price of commodities
∑𝑝₀=Total of base year price for various commodities

7. Price 2021 Price 2022
Rice 110 120
Milk 55 65
Wheat 20 25
Pulses 95 100
∑𝑝₀= 280 ∑𝑝₁= 310
P₀₁ =
∑𝑝₁
∑𝑝₀
X 100
∑𝑝₀= 280
∑𝑝₁= 310
P₀₁ =
310
280
X 100 = 110.71
It means as compared to 2021, there is net increase in price of 10.71% in 2022

8. Simple Average of Price Relative
When this method is used to construct a price index,
price relative are obtained for the various items
included in the index and then an average of these
relatives is obtained using any one of the measures of
central tendency.
P₀₁ =
∑( 𝑝₁
𝑝₀
X 100)
𝑁
N= number of items whose price relatives are averaged

9. Price 2021 Price 2022 𝑝₁
𝑝₀
X 100
Rice 110 120 109.09
Milk 55 65 118.18
Wheat 20 25 125.00
Pulses 95 100 105.26
∑𝑝₀= 280 ∑𝑝₁= 310 ∑
𝑝₁
𝑝₀
X 100=457.53
P₀₁ =
∑( 𝑝₁
𝑝₀
X 100)
𝑁
P₀₁ =
457.53
4
114.38

10. Weighted Index Number
I. Weighted Aggregative Index Number
II. Weighted Average of Relative Index Number
Weighted Aggregative Index Number:
1. Laspeyres Method
2. Paasche method
3. Bowley’s Method
4. Fisher’s Ideal Method

11. Laspeyres Method
P₀₁ =
∑𝑝₁𝑞₀
∑𝑝₀𝑞₀
X 100
Paasche Method
P₀₁ =
∑𝑝₁𝑞₁
∑𝑝₀𝑞₁
X 100
Bowley’s Method
P₀₁ =
𝐿+𝑃
2
Fisher’s Method
P₀₁ =
𝐿 𝑋 𝑃

12. Weighted Average of Relative Index Number
P₀₁ =
∑𝑃𝑉
∑𝑉
P = Price Relative
P =
𝑝₁
𝑝₀
X 100
V = Value weight i.e. p₀q₀