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Index numbers are meant to study the change in the effects of such factors which cannot be
measured directly. According to Bowley, “Index numbers are used to measure the changes in
some quantity which we cannot observe directly”. For example, changes in business activity in a
country are not capable of direct measurement but it is possible to study relative changes in
business activity by studying the variations in the values of some such factors which affect
business activity, and which are capable of direct measurement.
Index numbers are commonly used statistical device for measuring the combined
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fluctuations in a group related variables. If we wish to compare the price level of consumer items
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today with that prevalent ten years ago, we are not interested in comparing the prices of only one
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item, but in comparing some sort of average price levels. We may wish to compare the present
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agricultural production or industrial production with that at the time of independence. Here
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again, we have to consider all items of production and each item may have undergone a different
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fractional increase (or even a decrease). How do we obtain a composite measure? This composite
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measure is provided by index numbers which may be defined as a device for combining the
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variations that have come in group of related variables over a period of time, with a view to
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obtain a figure that represents the ‘net’ result of the change in the constitute variables.
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Index numbers may be classified in terms of the variables that they are intended to measure. In
business, different groups of variables in the measurement of which index number techniques are
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commonly used are (i) price, (ii) quantity, (iii) value and (iv) business activity. Thus, we have
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index of wholesale prices, index of consumer prices, index of industrial output, index of value of
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exports and index of business activity, etc. Here we shall be mainly interested in index numbers
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of prices showing changes with respect to time, although methods described can be applied to
other cases. In general, the present level of prices is compared with the level of prices in the past.
The present period is called the current period and some period in the past is called the base
period.
Index Numbers:
Index numbers are statistical measures designed to show changes in a variable or group
of related variables with respect to time, geographic location or other characteristics such as
income, profession, etc. A collection of index numbers for different years, locations, etc., is
sometimes called an index series.
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The main uses of index numbers are given below:
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• Index numbers are used in the fields of commerce, meteorology, labour, industrial, etc.
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• The index numbers measure fluctuations during intervals of time, group differences of
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geographical position of degree etc.
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•
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They are used to compare the total variations in the prices of different commodities in
which the unit of measurements differs with time and price etc.
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• They are used in studying difference between the comparable categories of animals,
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persons or items.
•
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Index numbers of industrial production are used to measure the changes in the level of
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Index numbers of import prices and export prices are used to measure the changes in the
trade of a country.
• The index numbers are used to measure seasonal variations and cyclical variations in a
time series.
There are two methods of constructing unweighted index numbers. (1) Simple Aggregative Method
(2) Simple Average of Relative Method
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The simple average of relative method is very simple and easy to apply is superior to simple
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aggregative method. This method has only disadvantage that it gives equal weight to all items.
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Example:
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The following are the prices of four different commodities for and . Compute a price
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index by (1) Simple aggregative method and (2) Average of price relative method by using both arithmetic
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Price in
Price in
Solution:
The necessary calculations are given below:
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Wheat
Rice
Gram
Total
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(1) Simple Aggregative Method:
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(2) Average of Price Relative Method (using arithmetic mean):
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When all commodities are not of equal importance. We assign weight to each commodity relative to
its importance and index number computed from these weights is called weighted index numbers.
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Example:
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Compute the weighted aggregative price index numbers for with as base year using (1)
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Laspeyre’s Index Number (2) Paashe’s Index Number (3) Fisher’s Ideal Index Number (4) Marshal
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Prices Quantities
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Commodity
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Solution:
Prices Quantity
Commodity
Laspeyre’s Index Number
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Paashe’s Index Number
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