Indices Chapter 09
Index Numbers: Index numbers are measure that designed to show changes in a variable or group
of related variables with respect to time e.g. income, inflation etc.
1) Simple Index Number: It measure percentage change in single variable with respect to a base.
2) Composite Index Number: It measures an average percentage change in a group of relative
variables with respect to a base.
i) Price Index Numbers: It measures the relative changes in the price of commodity between two time
periods.
ii) Quantity Index Numbers: It measures relative changes in the physical quantity of good produced,
consumed or sold for an item or group of items.
1) Simple Price Index or Price Relative:
Methods to Measure Physical Quantities:
i) Fix Base Method:
Find Price relative or Price index using 2018 as base year.
Years Price
2018 30
2019 45
2020 55
2021 100
Chain Base Method:
Example: Find price index using chain base method
Years Price L.R/ICAP Chain Index
20x5 100 100 100
20x6 110
20x7 120
20x8 130
20x9 160
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2) Composite Price Index:
Composite
Index
Un-weighted Index Weighted Index
Simple Aggregate Simple Average Laspeyre’s
Paasche’s
Fisher’s
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Finding Index By Simple Aggregate Method:
∑
∑
Years Price of A Price of B Price of C
2020(Base) 10 5 6
2021 10 6 12
Finding Index by Simple Average Method:
∑( )
Years Price of A Price of B Price of C
2020(Base) 10 5 6
2021 10 6 12
Note: Convert to and to if quantity index is required.
Weighted Price Index:
Laspeyre’s Index:
It is based on base year
Laspeyre’s price index considers quantities of base period as weights and ignore the change in
quantity in current period due to price effect (the general demand supply effect).
∑
∑
∑
∑
It is also called based year weighted index
Only price information is required in current year
Overstate inflation
Paasche’s Index:
It is based on current year
Paasche’s price index considers quantities of current period.
∑
∑
∑
∑
It is also called current year weighted index
Price and quantity each information is required in current year.
Understates Inflation
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Fisher’s Index:
√
√
Example: Goods
A 5 7 10 15
B 10 15 5 8
C 6 10 20 15
(156.8%, 111.36%) (153.06%, 108.69%) (154.91%, 110.01%)
Weighted Average of Price:
∑
∑
Substituting the values in above formula we will get the result that is:
∑
∑
Example:
Goods Prices W
2021 2022
A 4 9 10
B 6 11 15
C 10 9 15
Consumer Price Index: (CPI)
It is also called retail price index or cost of living index
It is a composite price index calculated using any of the following method
Aggregate Expenditure method:
∑
∑
Household or Family Budget Method:
∑
∑
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Purchasing
Price CPI
Power
Formulae to Remember:
Purchasing Power =
Real Income = Income x P.P
P.P =
C.P.I =
Example:
Real Income of a person in 2012 was 24000 with CPI of 105. If CPI in 2013 is 120, find his real
income in 2013 that makes his purchasing power equals to 2012.
Example:
In 1980 the wage of an employee was Rs. 1200 and CPI was 180. It rose to 220 in 1982.
Calculate the additional dearness allowance to be paid to the employee if he has to be
compensated. (Rs. 267)
Example:
Find Purchasing power in each year.
Year CPI
2021 100
2022 105
2023 112
2024 120
2025 90
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Example: Calculate Real Income in each case
Years Income CPI Real Income Status
2020 15000 100 15000/100=15000 Equilibrium
2021 17000 98 17000/98=17346.7 Surplus
2022 20000 106 20000/106=18868 Deficit
2023 26000 122 26000/122=21311 Deficit
Example: If the current year weighted index is 5% higher than the base year weighted index. Fischer’s
index is 250. Find Laspeyre’s and Paasche’s price index.
(243.975, 256.1)
Example: If Fischer’s index is 10% more than the Laspeyre’s index. If base year weighted index is
109.5. Find Paasche’s index.
(132.49)
Rate of Inflation/Deflation:
Inflation
Positive Value
Deflation
Negative Value
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Example: Find Rate of Inflation or Deflation of each of the following years.
Year CPI
20x5 100
20x6 95
20x7 120
20x8 130
20x9 97
Quick facts:
Nominal GDP accounts for current prices which is affected by inflation and real GDP provides
the actual output value.
If GDP Deflator is 115% , It means 15% is Inflation rate.
GDP is deflator is the broader measure of inflation than CPI.
Index numbers are the barometer of industry trade and commerce now a days.
Index number is used in forecasting business conditions in the country.
In Price index numbers the choices of base year is very difficult.
It is not possible to take into account the change in the quality of variables.
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