Statistics for Economics Class 11 Notes Chapter 8
Index Numbers
Index Number
An index number is a statistical device for measuring changes in the magnitude of a group
of related variables. It represents the general trend of diverging ratios from which it is
calculated.
According to Croxton and Cowden, “Index numbers are devices for measuring difference
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in the magnitude of a group of related variables.”
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Methods of Constructing Index Numbers
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Construction of Simple Index Numbers
There are two methods of constructing simple index numbers.
(i) Simple Aggregative Method In this method, we use the following formula
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P01=ΣP1ΣP0×100
Here, P01 = Price index of current year
ΣP1 = Sum of prices of the commodities in the current year
ΣP0 = Sum of prices of the commodities in the base year
(ii) Simple Average of Price Relatives Method
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According to this method, we first find out price relatives from each commodity and then
take simple average of all the prices relatives.
Price relatives, P01 = Current year price (P1) Base year price (P0)×100
We can find out price index number of the current year by using the following formula
P01=∑[P1P0×100]N
Construction of Weighted Index Numbers
(i) Weighted Average of Price Relative Method
According to this method, weighted sum of the price relatives is divided by the sum total
of the weight. In this method, goods are given weight according to their quantity, thus
P01=ΣRWΣW
Here, P01 = Index number for the current year in relation to the base year
W = weight
R = price relative
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(ii) Weighted Aggregative Method Under this method, different goods are accorded
weight according to the quantity bought therefore, suggested different techniques of
weighting some of well known methods are as under
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Fisher’s Method is considered as ‘Ideal’ because
It is based on variable weights.
It takes into consideration the price and quantities of both the base year and current
year.
It is based on Geometric Mean (GM) which is regarded as the best mean for
calculating index number.
Fisher’s index number satisfies both the Time Reversal Test and Factor Reversal
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Test.
Consumer Price Index or Cost of Living Index Number
The consumer price index is the index number which measures the averages change in
prices paid by the specific class of consumers for goods and services consumed by them in
the current year in comparison with base year.
Construction of Consumer Price Index
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Selection of the consumer class
Information about the family budget
Choice of base year
Information about prices
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Weightage – There are two ways of according weights
Quantity weight
Expenditure weight
The following formula is used to find consumer’s price index
Consumer Price Index (CPI) = ΣWRΣW
Wholesale Price Index (WPI)
The Wholesale Price Index (WPI) measures the relative changes in the prices of
commodities traded in the wholesale markets. In India, the wholesale price index
numbers are constructed on weekly basis.
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Industrial Production Index
The index number of industrial production measures changes in the level of industrial
production comprising many industries. It includes the production of the public and the
private sector. It is a weighted average of quantity relatives. The formula for the index is
P01=Σq1×WΣW×100
Construction of Index Number of Industrial Production
Classification of industries
Statistics or data related to industrial production
Weightage
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Agricultural Production Index
Index number of agricultural production is weighted average of quantity relatives.
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Sensex
Sensex is the index showing changes in the Indian stock market. It is a short form of a
Bombay Stock Exchange sensitive index. It is constructed with 1978-79 as the reference
year or the base year. It consists of 30 stocks of leading companies in the country.
Purpose of Constructing Index Number
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Purpose of constructing index number of prices is to know the relative change or
percentage in the price level over time. A rising general price level over time is a
pointer towards inflation, while a falling general price level over time is a pointer
towards deflation.
Purpose of constructing index number of quantity is to know relative change or
percentage change in the quantum or volume of output of different goods and
services. A rising index of quantity suggests a rising level of economic activity and
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vice-versa.
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