IBA-JU Course Instructor: Dr Swapan Kumar Dhar Index Numbers An index number is a statistical measure of relative changes in a variable

or a group of related variables with respect to time, place or other characteristics. It is a pure number and expressed in percentage. It is used to compare the level of price, quantity or value of a group related articles at different times or at different geographical locations at the same time. Example: Prices of Food Items Commodity Unit Price per unit (Taka) 2001 2010 Rice Kg 25.00 48.00 Wheat Kg 15.00 25.00 Fish Kg 200.00 300.00 Bread Pound 12.00 24.00 Milk Liter 24.00 40.00 If I ask someone How does the overall food price in 2010 compare with that in 2001 how many times or what percent? A number that provides an answer to this question will be called an index number. Simple Index Numbers If an index number is used to measure the relative change in just one variable such as hourly wages in manufacturing we refer to it as a simple index number. Example: The average hourly wage in manufacturing in 1980 was $ 7.27. In March 1994 it was $ 12.01. What is the index of hourly earnings in manufacturing for March 1994 based on 1980? Solution: Hourly earnings in March,1994 $12.01 Index = 100 = 100 = 165.2 . Hourly earnings in 1980 $7.27 Thus hourly earnings in manufacturing in 1994 compared with 1980 were 165.2%, that is, they increased 65.2% during that period. Example: It is reported that the farm population dropped from 30,529,000 in 1930 to an estimated 5,100,000 in 1994. What is the index of farm population for 1994 based on 1930? Solution: 1994 Population 5,100, 000 Index = 100 = 100 = 16.7 . 1930 Population 30, 529, 000 This indicates that the farm population in 1994 compared with 1930 was 16.7% or it decreased 83.3% during that period found by (100-16.7). Types of Index Numbers An index can be classified as a price index, a quantity index, a value index, a special purpose index, cost of living index.

Methods of Construction of Index Numbers The following chart gives the various methods of constructing Index numbers.
INDEX NUMBERS

Aggregative method

Relative method

Simple Average of Relatives

Weighted Average of Relatives

A.M. method

G.M. method

A.M. method

G.M. method

Simple Aggregative method

Weighted Aggregative method

Laspeyres formula

Passches formula

EdgeworthMarshalls formula

Fishders Ideal formula

Bowleys formula

Example: [Simple Aggregative method] Find Price Index number by the method of Aggregative from the following data: Commodity Rice Wheat Fish Pulse Solution: Let Base Price 36 30 42 25 Current Price 42 35 38 33

p0

and

pn

denote the Base Price and Current Price. Table: Calculations for Price Index Number

Commodity Rice Wheat Fish Pulse Total

Base Price

Current Price

( p0 )
36 30 42 25 p0 =133

( pn )
42 35 38 33 pn =148

Using Simple Aggregative method, we have pn 148 100= 100 =111.28 . Price Index Number (P0n )= p0 133

Example: [Weighted Aggregative method] Find by the weighted aggregative method, the Price Index number from the following data: Commodity A B C D E Solution: Let Base Price (1961) 32 25 120 35 90 and Current Price (1965) 50 25 140 40 100 Weight 8 6 3 5 7

p0 , p n

denote the Base Price, Current Price and weight respectively.

Table: Calculations of Price Index Numbers Commodity A B C D E Total Base Price Current Price Weight

( p0 )
32 25 120 35 90 -

( pn )
50 25 140 40 100 -

( w)
8 6 3 5 7 -

p0 w
256 150 360 175 630 1571 = p 0w

pn w
400 150 420 200 700 1870 = p nw

Using weighted aggregative method, we have Price Index Number (P0n )=

Example: Calculate the price index number from the following data using weighted aggregative formula. Commodity A B C D Solution: Let Unit Quintal Kilogram Dozen Litre Weight 14 20 35 15 Price per unit Base period Current period 90 120 10 17 40 60 50 95

pn w 100= 1870 100 =119.03 . 1571 p0 w

w, p0 , pn

denote the Weight, Base Price and Current Price respectively.

Table: Calculations of Price Index Number Commodity A B C D Total Base Price Current Price Weight

( p0 )
90 10 40 50 -

( pn )
120 17 60 95 -

( w)
14 20 35 15 -

p0 w
1260 200 1400 750 3610

pn w
1680 340 2100 1425 5545

Weighted Aggregative Price Index Number =

pn w 100= 5545 100=153.6 . 3610 p0 w

= p0 w

= pn w

Example: Calculate the Price Index Number from the following data, by using Laspeyres formula. Commodity Rice Oil Wheat Sugar Fish base and current year and Commodity Rice Oil Wheat Sugar Fish Total 1990 Price (Taka) 300 400 250 200 125 Quantity (Kg) 10 6 4 2 2 1995 Price (Taka) 450 500 400 350 200

Solution: Let us take 1990 as Base year and 1995 as Current year. Let

p0 , p n p 0 q0
3000 2400 1000 400 250 7050

be the prices at

q0

be quantity at base year.

Table: Calculations of Laspeyres Price Index Number

p0
300 400 250 200 125 -

pn
450 500 400 350 200 -

q0
10 6 4 2 2 -

p n q0
4500 3000 1600 700 400 10200

In Laspeyress formula, base year quantity Laspeyres Price Index Number =

Example: Calculate the price index number by (a) Paasches method, (b) Laspeyres method and hence find Fishers ideal price index number and Bowleys price index number from the following data: 1980 1990 Commodity Price Quantity Price Quantity A 8 5 12 6 B 12 4 16 5 C 10 6 12 8 Solution: Let

p0 q0 100= 10200 100=144.68 . 7050 p0 q0

(q0 ) is taken as weight.

p0 , q0 be the price and quantity at the base year and pn and qn p0

be the price and

quantity at the current year. Table: Calculations of Price Index Number Commodity A B C Total

q0
5 4 6 -

pn
12 16 12 pn qn

qn
6 5 8 248

p 0 q0
40 48 60 148 100=131.91

p n q0
60 64 72 196

p0 q n
48 60 80 188

pn qn
72 80 96 248

(a) Paasches Price Index Number =

188 p0 qn pnq0 100= 196 100=132.43 (b) Laspeyres Price Index Number = 148 p0 q0

100=

(c) Fishers Ideal Price Index Number = Laspeyres' Index No.Paasche's Index No.
= 131.91132.43= 17468.84=132.17

1 (d) Bowleys Price Index Number = (Laspeyres Index No. + Paasches Index No.) 2
= 1 2 (131.91+132.43)=132.17

Example: Find the Fishers Ideal Index Number for the year 1990 with 1980 as base year: Commodities A B C D Solution: Let Unit Kilogram Quintal Dozen Kilogram 1980 Quantity 6 7 5 3 Price (Taka) 4 3 9 2 Quantity 8 10 6 5 1990 Price (Taka) 6 5 7 3

p0 , pn be the prices and q0 , qn p0 q0 pn

be the quantities for the base year and current year

respectively. Table: Calculations for Price Index Number Commodity

qn
8 10 6 5 -

p 0 q0
24 21 45 6 96

p n q0
36 35 35 9 115

p0 q n
32 30 54 10 126

pn qn
48 50 42 15 155

A 4 6 B 3 7 C 9 5 D 2 3 Total Fishers Ideal Price Index Number =

Example: Calculate the Price index number for the year 1991 with 1981 as base using Laspeyres or Paasches formula, whichever will be applicable, on the basis of following data: Commodity A B C D Price (in Taka) 1981 22 16 20 8 1991 30 18 25 12 Money value (000 Taka) 1991 240 72 150 36

pnq0 pnqn 100 p0 q0 p0 qn

17825 115 155 100 =121.62. 100 = 96 126 12096

(Here money value means total value of a commodity) Solution: Let

p0 and pn be the prices at base year and current year and qn be the quantity at the qn = v pn quantity, we have

current year. Since the values at the current year are given and value = price Value

(v ) = p n q n ,

i.e.,

Hence, we find the price index number by using Paasches formula, since the quantity at the current year is available. [Note: Here Laspeyres formula is not applicable since Table: Calculations for Paasches Price Index Number Commodity A B C D Total

q0

is not available].

p0
22 16 20 8 -

pn
30 18 25 12 -

v ( = p n q0 )
240 72 150 36 -

v qn = p n
8 4 6 3 -

p0 q n
176 64 120 24 384

pn qn
240 72 150 36 498

Paasches Price Index Number

pnqn 100= 498 100=129.69 384 p0qn

Example: [Simple Price Relative method] Find Prince Index Number by the method of relatives (a) using arithmetic mean, and (b) using geometric mean from the following: Commodity Base Price Current Price Wheat 5 7 Milk 8 10 Fish 25 32 Sugar 6 12 Solution: Let

p0 , p n

denote the Base Price and Current Price.

Table: Calculations for Price Index Number Commodity Wheat Milk Fish Sugar Total

p0
5 8 25 6 44

pn
7 10 32 12 61

Price Relative 7 5 8 32 25 12 6

pn p0

100

100=140 100=125 100=128 100=200

10

(Price Relatives)=593
k 4

(a) Simple A.M. of Price Relative Index Number =

(Price Relatives) = 593 =148.25 .

(Product of Price Relatives) = 4 140 125 128 200 = 145.50 Example: (Weighted Price Relative method) Find, by the method of relatives (using arithmetic mean), the Index number from the following data: Commodity Weight Current Price (1995) Base Price (1991) Cloth 12 90 60 Wheat 18 250 180 Rice 30 400 320 Potato 6 180 120 Solution: Table: Calculations for Price Index Number
k

Commodity Cloth Wheat Rice Potato Total

Base Price

p0

Current price

pn

Weight

Price Relative I=

pn 100 p0

Iw
1800 2500.2 3750 900 8950.2

60 180 320 120 -

90 250 400 180 -

12 18 30 6 66

90 100=150 60 250 100=138.9 180 400 100=125 320 180 100=150 120
-

Weighted A.M. of Price Relative Index Number

Iw = 8950.2 =135.61 . w 66

Example : Find by the arithmetic mean method, (a) simple and (b) weighted price index numbers, from the following data: Commodity Base price Current Price Weight Rice 25 31 10 Wheat 20 27 7 Fish 100 115 4 Coal 2.5 3 3 Solution: Let

p0 , pn po
25 20 100 2.5 -

denote base price and current price and

be the weight.

Table: Calculations for Price Index Number Commodity Rice Wheat Fish Coal Total

pn
31 27 115 3 -

w
10 7 4 3 24

I=

pn 100 p0

Iw
1240 945 460 360 3005

31 100=124 25 27 100=135 20 115 100=115 100 3 100=120 2.5

(a) Simple arithmetic mean of Price Relatives Index number =

Price Relative

k Iw = 3005 =125.21. (b) Weighted Arithmetic Mean of Price Relatives Index Number = w 24 (i)
Fishers Ideal Quantity Index Number =

494 =123.5 . 4

q p q p
n 0

0 0

q p q p
n 0

n n

100 =

248 320

756 980

100

=77

Cost of Living Index Numbers: Cost of Living Index Number C.L.I) are those index numbers which are designed to measure the relative change in the cost of living in various sections or classes of the society for maintaining same standard of living in two different time periods due to the rise or fall of price of consumer goods during these two periods. Cost of living index numbers are also called Consumer Price Index numbers because they help in determining the change in the retail prices of commodities consumed by the people. Construction of cost of living index number The following steps are necessary in constructing a Cost of Living Index Number of a specific class in a specific locality. 1. The first step is to decide the specific class of people for whom the index number is intended. The class selected should consist of homogeneous group of people with respect to income. 2. The second step is to conduct a `family enquiry, i.e. to collect information regarding the nature, quality and amount of goods consumed by an `average family of that class. This helps to select the items to be included in the construction of index number and also to fix the weight of each item. 3. The commodities are then classified into five major groups (a) Food, (b) Clothing, (c) Fuel and Lighting, (d) House rent and (e) Miscellaneous. Each of these groups are given subdivided into smaller groups, termed as subgroups. For example, the `Food group consists of several subgroups, viz. cereals (wheat, rice, etc.); pulses, meat, fish and poultry, milk and milk products; fats and oils, fruits and vegetable, etc.

4. The next step is to collect the retail prices of the commodities from the standard shops and cooperative stores in local market. Price quotations should be taken at least once a week. If there is a different price quotation for one commodity, the price relative of each commodity is then computed by taking simple average of price relatives of different price quotations. 5. Cost of Living Index Numbers are generally constructed for each week. The average of the weekly index numbers is taken as the index number for a month. The average of monthly index numbers gives the cost of living index number for the whole year. Method of construction 1. First, we determine the price index number of each group using the method of weighted arithmetic mean of the price relatives of the commodities included in that group.

(Price Relative)w = p Group Index Number (I)= = w

pn
0

100 w

Weight of each item in the group is calculated as the percentage expenditure on that item in relation to the total expenditure of that group.

w=

Cost of Living Index Number (C.L.I) =

2. Finally, we determine the weighted A.M. of the five group index numbers with weight as the percentage expenditure on a group in relation to the total expenditure by an average family.

p0 q0 100 and obviously p0q0

w=100.
IW
as the weight of each group is expressed in

W is

the weight of a group and

percentage. Applications and uses 1. Cost of Living Index Numbers are used to calculate the dearness allowance (D.A) of workers and employees in order to maintain the same standard of living as in the base year. 2. Purchasing power of money can be measured with the help of Cost of Living Index Numbers since, 1 Purchasing power of money = . Cost of Living Index Number 3. Real wage may be measured using Cost of Living Index Number since Real wage = Actual wage Cost of Living Index Number 100 .

W W=100

Similarly, Real income =

100 . Cost of Living Index Number Example: Find the general cost of living index of 1983 from the following table: Class Food Dress House rent 325 25 Fuel 255 15 Miscellaneou s 280 10

Actual income

Class Index 620 575 Weight 30 20 Solution: Table: Calculations for Cost of Living Index Class Food Dress House rent Fuel Miscellaneous Class Index 620 575 325 255 280

(I)

Weight (W) 30 20 25 15 10

IW
18600 11500 8125 3825 2800

Total Cost of Living Index

Example: With the base year 1960 as the base, the C.L.I. in 1972 stood at 250. X was getting a monthly salary of Taka 500 in 1960 and Taka 750 in 1972. How much should X have received as extra allowance in 1972 to maintain his standard of living as in 1960? Solution: The cost of living index number in 1972 was 250 with respect to the base 1960. The price in 1972 was Taka 250 when the price in 1960, was Taka 100. Hence, to maintain the same standard of living as in 1960, his salary should be 250 in 1972 if he was getting Taka 100 in 1960. Salary 1960 1972 100 250 500 250

IW = 44850 =448.5 W 100

W=100

IW=44850

100

500=1250

So, his salary should be Taka 1250 in 1972 and therefore, the amount of extra allowance = Taka 1250 Taka 750 = Taka 500. Example: The following data show the cost of living indices for different groups with their respective weights, for middle class people of Dhaka in 1957. Obtain the general cost of living index number. Mr. X was getting as salary Taka 250 in 1939 and Taka 429 in 1957. State how much he ought to have received as extra allowance in 1957 to maintain his standard of living at 1939 level. Base 1939=100 Group Group Index Group Weight Food 411.8 61.4 Clothing 544.8 4.5 Fuel and Light 388.0 6.5 House rent 116.9 8.9 Miscellaneous 284.5 18.7 Solution: Table: Calculations for Cost of Living Index Number Group Food Clothing Fuel and Light House rent Miscellaneous Total Cost of Living Index Group Index 411.8 544.8 388.0 116.9 284.5 -

(I)

Group Weight 61.4 4.5 6.5 8.9 18.7 100 =

(W)

IW
25284.5 2451.6 2522.0 1040.4 5320.1 36618.6

The

price in 1975 was Taka 366.2 with respect to the base 1939 when the price was Taka 100. Salary 1939 1957 100 366.2 250 366.2

IW = 36618.6 =366.2 . W 100

= IW

100

250=915.50

So, to maintain the same standard of living as in 1939, his salary should be Taka 915.50 in 1957. Hence he ought to have received as an extra allowance in 1957 an amount (Taka 915.50 Taka 429) = Taka 486.50.

Example: An enquiry into the budgets of middle class families in a certain city gave the following information. Food Fuel Clothing Rent Miscellaneous Expenses on 35% 10% 20% 15% 20% Prices (1983) 150 25 75 30 40 in Taka Prices (1984) 145 23 65 30 45 in Taka What is the cost of living index number of 1984 as compared that of 1983? Solution: The percentage expense on each group is taken as the weight of that group. Table: Calculations for Cost of Living Index Number Weight Price 1983 Price Relative 1984

Group Food Fuel Clothing Rent Miscellaneous Total

(W)
35 10 20 15 20

(p0 )
150 25 75 30 40 -

(p1 )
145 23 65 30 45 -

I=

p0 100 p1
96.67 92.00 86.67 100.00 112.50 -

IW
3383.45 920.00 1733.40 1500.00 2250.00 9786.85

100

= W

Cost of Living Index Number for 1984 with base 1983

Example 21: The table below shows the average wages in Taka for a day of a group of industrial workers during the year 1976 to 1987. The consumer price indices for these years with 1976 as base are also shown:
Year Average Wage CPI(1976 =100) 1976 11.19 100 1977 11.33 107.6 1978 11.44 106.6 1979 11.57 107.6 1980 11.75 116.2 1981 11.84 118.8 1982 11.89 119.8 1983 11.94 120.2 1984 11.97 119.9 1985 12.13 121.7 1986 12.28 125.9 1987 12.45 129.3

IW = 9786.85 =97.87 W 100

= IW

(a) Determine the real wages of the workers during the years 1976 87 as compared with their wages in 1976. (b) Determine the purchasing power of the Taka for the year 1976. What is the significance of this result? Solution: (a) For finding the real wages we have to divide average wage of workers by the consumer price index. Year Average Wage CPI Real Wage 1976 11.19 100.0 (11.19/100)%=11.19 1977 11.33 107.6 10.53 1978 11.44 106.6 10.73 1979 11.57 107.6 10.75 1980 11.75 116.2 10.11 1981 11.84 118.8 9.97 1982 11.89 119.8 9.92 1983 11.94 120.2 9.93 1984 11.97 119.9 9.98 1985 12.13 121.7 9.97 1986 12.28 125.9 9.75 1987 12.45 129.3 9.63 (b) If we divide Taka 1 by the price index of 1987, we get the purchasing power of Taka in 1976. Thus the purchasing power of Taka in 1987 shall be 100/129.3 = 0.77.

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This means that the purchasing of money has gone down. In 1987 the Taka could buy only 77% of what it could buy in 1976.

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