TAMIL NADU NATIONAL LAW SCHOOL

TIRUCHIRAPPALLI

ACADEMIC SESSION:
2016-2017

BUSINESS STATISTICS PROJECT:

INDEX NUMBER

SUBMITTED BY:

Gunjan Chandavat
ROLL NO. BC0140023

1
Acknowledgement

I take the opportunity to express my profound gratitude and deep regards to my guide for
Dr.P.Kumaresan his exemplary guidance, monitoring and constant encouragement throughout
the course of the project. The help and guidance given by him time to time shall carry me a long
way in the journey of life which I will embark .

I also express a deep sense of gratitude to our Vice Chancellor for giving me this opportunity. I
am obliged to my parents for showing faith which helped me in completing the project on time.

Lastly, I thank , my friends for their encouragement without which the assignment would have
not been possible.

2
TABLE OF CONTENTS:

1. INTRODUCTION 4

2. CHARACTERISTICS & USES 5

3. IMPORTANCE OF INDEX NUMBER 7

4. PROBLEMS IN CALCULATING INDEX NUMBERS 8

5. LIMITATIONS 11

6. METHODS OF CALCULATING 12

7. PROBLEMS 14

8. REFERENCES 21

3
INTRODUCTION:

INDEX NUMBER:

A number that expresses the relative change in price, quantity, or value compared to a base
period.

DEFINITIONS:

1. Index numbers are devices for measuring differences in the magnitude of a group of
related variables-Croxton & Cowden.1
2. An index number is a statistical measure designed to show changes in a variable or a
group of related variables with respect to time, geographic location and other
characteristics such as income, profession, etc.-Spiegel2
3. According to Patternson : " In its simplest form, an index number is the ratio of two index
numbers expressed as a percent . An index is a statistical measure, a measure designed to
show changes in one variable or a group of related variables over time, with respect to
geographical location or other characteristics".3

OBJECTIVE OF STUDY:
The objective of this research project is to analyse the index number calculated and to
see the trend over the years , find out the different ways of calculating the index number
and to make the layman understand in simpler terms the inflation and other market trends
going on in the economy.

METHODOLOGY:
The researcher has worked on this project INDEX NUMBERS. The researcher has
used the secondary resources, which the researcher has taken from various media-
journals, online resources etc. and only secondary data has been used while making this
assignment. The researcher has taken the prices and quantities of various consumer goods
in order to calculate & analyze the index number.

1
S.P.Gupta,Statistical Methods,Sultan Chand & Sons.,2014,pg no.536
2
Ibid.
3
Ibid.

4
 SCOPE OF THE PROJECT :
The project deals with index number and its calculation using different methods, the data
has been obtained from various government departments relating to consumer goods and
indexes of the same.

CHARACTERISTICS OF INDEX NUMBERS:

Following are some of the important characteristics of index numbers :

Index numbers are expressed in terms of percentages to show the extent of relative
change.4
Index numbers measure relative changes.They measure the relative change in the value of
a variable or a group of related variables over a period of time or between places. 5
Index numbers measures changes which are not directly measurable. 6
The cost of living, the price level or the business activity in a country are not directly
measurable but it is possible to study relative changes in these activities by measuring the
changes in the values of variables/factors which effect these activities.7

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
commonly used are (i) price, (ii) quantity, (iii) value and (iv) business activity. Thus, we have
index of wholesale prices, index of consumer prices, index of industrial output, index of value of
exports and index of business activity, etc.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.8

4
http://download.nos.org/srsec311new/L.No.38.pdf
5
Ibid
6
Ibid
7
Supra note 2.
8
http://www.emathzone.com/tutorials/basic-statistics/index-numbers-and-types-of-index-numbers.html

5
USES OF INDEX NUMBERS:

(i)Index numbers are economic barometers. They measure the level of business and economic
activities and are therefore helpful in gauging the economic status of the country.9

(ii) Index numbers measure the relative change in a variable or a group of related variables under
study.10

(iii) Consumer price indices are useful in measuring the purchasing power of money, thereby
used in compensating the employes in the form of increase of allowances.11

Index Numbers have the following features :

(i) Index numbers are specialised averages which are capable of being expressed in
percentage.12

(ii) Index numbers measure the changes in the level of a given phenomenon.13

(iii) Index numbers measure the effect of changes over a period of time.14

TYPES OF INDEX NUMBERS:15

Index numbers are names after the activity they measure. Their types are as under :

Price Index : Measure changes in price over a specified period of time. It is basically the ratio of
the price of a certain number of commodities at the present year as against base year.

Quantity Index : As the name suggest, these indices pertain to measuring changes in volumes of
commodities like goods produced or goods consumed, etc.

9
Supra note.4
10
Ibid.
11
Ibid.
12
http://sol.du.ac.in/mod/book/view.php?id=1656&chapterid=1675
13
Ibid.
14
Supra no.13.
15
Supra no.4

6
Value Index : These pertain to compare changes in the monetary value of imports, exports,
production or consumption of commodities.

The importance or the uses of index numbers of prices are :

(a) Measures Changes in Price Level and Standard of Living:

Index number of prices is a method through which we can measure changes in the price level
over time. This means that whether a country faces inflation or deflation can be known from the
index number of prices. Thus, it helps to determine the changes in the economic conditions of
people.

Inflation reduces standard of living while deflation increases living standards. However, this
statement is too simplistic and ignores many aspects. Anyway, as the price index changes, per
capita income changes. A change in per capita income causes a change in the standard of
living.16

(b) Regulation of Wage Rate:

Salaries and wages and dearness allowances are revised by the government when price level
changes. Higher wages and dearness allowances are often given by the appropriate authorities
when index numbers of prices rise so as to protect the real income of the workers.17

In other words, a fall in real income consequent upon a rise in price level measured by the index
numbers of prices is compensated in the form of higher wages and dearness allowances. Cost of
living index can be made a basis for the regulation of wage rates and other allowances.

(c) Determination of Government Policies:

Index numbers of prices serve as guide to government policies. The price stability objective of
the government policy is based on index numbers. It formulates policies to control inflation and
deflation. Index numbers also enable governments to explain their population policies,
agricultural and industrial policies, taxation policy, etc.
16
Ibid.
17
Ibid.

7
In addition, index numbers serve as a guide to the central bank (i.e., monetary authority) to take
appropriate action against price changes.18

(d) Guide for Businessmen:

Index numbers also serve as a guide to businessmen. Rising prices as indicated by index numbers
may create an atmosphere of optimism. Now these people will be interested in investing more to
have larger profit. Opposite reaction follows when prices fall.19

(e) International Comparisons:

An index number facilitates international comparisons of economic variables. For instance, we

want to make comparisons in living standards between different nations. We then construct real
per capita of incomes of different nations on the basis of index numbers of prices. Thus, index
numbers measure the levels of development of different countries.20

Problems in the Construction of Index Numbers

While constructing Index Number, the following problems arise :21

1. The purpose of Index: Before constructing an Index Number, it is necessary to define

precisely the purpose for which they are to be constructed. A single Index can not fulfill all the
purposes. Index Numbers are specialised tools which are more efficient and useful when
properly used. If the purpose is not clear, the data used may be unsuitable and the indices
obtained may be misleading. If it is desired to construct a Cost of Living Index Number of labour
class, then only those item will be included, which are required by the labour class.22

2. Selection of the items: The list of commodities included in the Index numbers is called the
`Regimen'. Because it may not be possible to include all the items, it becomes necessary to

18
Supra note 12.
19
Ibid.
20
Ibid.
21
Supra note 18
22
Supra note 17

8
decide what items are to be included. Only those items should be selected which are
representative of the data, e.g. in a consumer Price Index for working class, items like scooters,
cars, refrigerators, cosmetics, etc. find no place. There is no hard and fast rule regarding the
inclusion of number of commodities while constructing Index Numbers. The number of
commodities should be such as to permit the influence of the inertia of large numbers. At the
same time the numbers should not be so large as to make the work of computation uneconomical
and even difficult. The number of commodities should therefore be reasonable. The following
points should be considered while selecting the items to be included in the Index :

(i) The items should be representative.

(ii) The items should be of a standard quality.

(iii) Non-tangible items should be excluded.

(iv)The items should be reasonable in number.23

3. Price Quotations: It is neither possible non necessary to collect prices of the commodities from
all markets in the country where it is dealt with, we should take a sample of the markets.
Selection must be made of the representative places and persons. These places should be well
known for trading these commodities.24

It is necessary to select a reliable agency from where price quotations are obtained.

4. Selection of the Base period: In the construction of Index Numbers, the selection of the base
period is very important step since the base period serves as a reference period and the prices for
a given period are expressed as percentages of those for the base year, it is therefore necessary
that

(i) the base period should be normal and

(ii) it should not be too far in the past.

23
Ibid.
24
Ibid.

9
There are two methods by which base period can be selected (i) Fixed base method and (ii)
Chain base method.25

Fixed base Method: According to this any year is taken as a base. Prices during the year are
taken equal to 100 and the prices of other years are shown as percentages of those prices of the
base year. Thus if indices for 1998, 99,2000, and 2001 are calculated with 1997 as base year,
such indices will be called as fixed base indices.

Chain base Method: According to this method, relatives of each year are calculated on the basis
of the prices of the preceding year. The Chain base Index Numbers are called as Link Relatives.

5.The choice of an average: An Index number is a technique of `averaging' all the changes in the
group of series over a period of time, the main problem is to select an average which may be able
to summaries the change in the component series adequately. Median. Mode and Harmonic
Mean are never used in the construction of index numbers. A choice has to be made between the
Arithmetic Mean and the Geometric Mean. Merits and demerits of the two are then to be
compared. Theoretically a .M. is superior to the A.M. in many respects but due to difficulty in its
computation, it is not widely used for this purpose.26

6. Selection of appropriate weights: The term weight refers to the relative importance of the
different items in the construction of index numbers. All items are not of equal importance and
hence it is necessary to find out some suitable methods by which the varying importance of the
different items is taken into account. The system of weighting depends upon the purpose of index
numbers, but they ought to reflect the relative importance of the commodities in the regimen.
The system may be either arbitrary or rational. The weight age may be according to either :

(1) the value of quantity produced, or

(2) the value of quantity consumed, or

(3) the value or quantity sold or put to sale.

There two methods of assigning weights.

25
Supra note 17.
26
Ibid.

10
 (i) Implicit and

(ii) Explicit.

Implicit: Under this method, the commodity to which greater importance has to be given is
repeated a number of times i.e., a number of varieties of such commodities are included in
the index numbers as separate items.

Explicit: In this case, the weights are explicitly assigned to commodities. Only one kind of a
commodity is included in the construction of Index umbers but its price relative is multiplied
by the figure of weights assigned to it. There has to be some logic in assigning such type of
weights.

Limitations of Index numbers

1 They are approximations: They cannot be taken as infallible guides. Their data are open
to question and they lead to different interpretations.27

2. International comparisons are difficult, if not impossible, on account of the different

bases, different sets of commodities or difference in their quality or quantity.28

3. Comparison between different times are also not easy. Over long periods, some popular
commodities are replaced by others. Entirely new commodities come to figure in
consumption or a commodity may be vastly different from what it used to be. Think of a
modern railway engine and one of the early times. Ford car 1984 is a different commodity
from the 1975 Ford.29

4. Index numbers measure only changes in the sectional price levels. An index number
that helps us to study the economic conditions of mill hands or railway coolies will be useless
for a study of the conditions of college lecturers. An entirely different set of commodities
will have to be selected. Different people use different things and hold different assets.

27
https://economics-the-economy.knoji.com/uses-and-limitations-of-index-numbers/.
28
Ibid.
29
Ibid.

11
 Therefore, different classes of people are affected differently by a given change in the price
level. Hence, the same index number cannot throw light on the effects of price changes on all
sections of society.30

5 The first major problem is concerned with the choice of a base year. Two criteria for
the selection of base year are that it must show economic stability and it must not be too
distant from the given year. The base period must not coincide with abnormally high or low
prices. But it is very difficult to get a normal year free from any economic disturbances.

Further, if the base year is too distant from the current year, it is possible that the pattern of
consumption may change considerably. New types of commodities may be introduced and
consumers may change over to these types of commodities which are not comparable with
the similar types used in the base period.

6. Data or statistics collected are often unreliable and less accurate. As a result,
estimates based on such data are bound to be unreliable.

METHODS OF CALCULATING:

Simple Aggregative Method

30
Ibid.

12
 This is a simple method for constructing index numbers. In this, the total of current year
prices for various commodities is divided by the corresponding base year price total and
multiplying the result by 100.

Simple Aggregative Price Index :P01=( P1/ P0)*100

Where P01= Current price Index number

p1 = the total of commodity prices in the current year

p0 = the total of same commodity prices in the base year

Limitation of this method:

The units used in the price or quantity quotations can exert a big influence on the
value of index.31
No consideration is given to the relative importance of the commodities.32

Simple Average of Price Relatives Method

In this method, the price relatives for all commodities is calculated and then their average is
taken to calculate the index number.

Thus, P01 = P1*100

P0

where P01 is the price index

N is the number of items, p0 is the price in the base year

31
S.P.Gupta,Statistical Methods,Sultan Chand & Sons.,2014
32
Ibid

13
p1 of corresponding commodity in present year (for which index is to be calculated)

WEIGHTED AVERAGE METHOD

Laspeyres price index

Laspeyre's price index, also known as base-weighted index or fixed-weighted index,

calculates the index number using the weight of the base year as weight while ignoring the
weight of subsequent year.

Professor Ernst Louis tienne Laspeyres (November 28, 1834 August 4, 1913), an
academic of economics and statistics in Germany came up with this index. It was one of the
many contributions made by the German mathematician into the field of economics.

Laspeyre's price index = [PiW0] / [P0W0] X 100

Since only the base quantities are used for the calculations, the changes which are only due to
price changes can be studied through this index.

Paasche's price index

Paasche's price index price index, also known as end-year-weighted index, calculates the
index number using the weight of the end year as weight while ignoring the weight of the
base year.

Professor Hermann Paasche (February 24, 1851 April 11, 1925), an academic of economics
and statistics in Germany came up with this index. He was a gifted statistician and
economist.

Paasche price index = [PiWi] / [P0Wi] X 100

Fishers Ideal Index Number:

Geometric mean of Laspeyres and Paasches index numbers is known as Fishers ideal
index number. It is called ideal because it satisfies the time reversal and factor reversal test.

Laspeyre's Index Paashe's P01=P1qoPoqoP1q1Poq1100

14
 1. The indexes has been collected from various cities which shows Consumer Price
Index of Industrial workers:33

Major Cities Year (2010-11) Year(2011-12)

Bengaluru 185 195

Delhi 166 179

Kolkata 176 187

Mumbai 178 196

Jaipur 183 195

Solution:

Major Cities Year (2010-11) Year(2011-12)

Bengaluru 185 195

Delhi 166 179

Kolkata 176 187

Mumbai 178 196

Jaipur 183 195

Po=888 P1=952

Simple Aggregative Price Index :P01=( P1/ P0)*100

33
Labour Bureau, Ministry of Labour & Employment, Government of India.RBI Monthly Bulletin November 2012

15
 P01=(952/888)*100

P01=107.20(Ans.)

The simple inference from the above table is that there has been an increase in the cost of
living in major cities of India, the overall increase is 7.20% from the base year. Thus, there
has been a hike in prices of commodities which leads to increase in expenditure for the
industrial workers.

2. The below table shows the indexes collected for different commodities in the year of
2013 & 2014 in the month of January for the consumer.34

Commodity YEAR(JAN,2013) YEAR(JAN,2014)

CEREALS 108.4 119.6

MILK 104.4 114.1

OIL 105.1 106.8

FRUITS 103.2 113.9

PULSES 106 108.9

The method used here will be Simple average of Price Relatives Method: using arithmetic
mean.

Solution:

34
mospi.nic.in/mospi_new/site/PressRelease.aspx

16
 Commodity YEAR(JAN,2013)Po YEAR(JAN,2014)P1 PRICE
RELATIVES
CEREALS 108.4 119.6 119.6/108.4
*100=110.33
MILK 104.4 114.1 109.29

OIL 105.1 106.8 101.61

FRUITS 103.2 113.9 110.36

PULSES 106 108.9 102.73

534.32

P01 = P1*100

P0

By applying the formula, 534.32/5=106.86(Ans.)

Although arithmetic mean and geometric mean both can be used, but arithmetic mean is
often preferred because it is easier to compute and much better known.

From the above solution of index number it can be concluded that there is 6.86% increase in
prices of commodities from previous year and hence consumer price index shows a hike in
prices.

17
 3. The below table shows the data relating to cereals , non- alcoholic beverages,
prepared meal and snacks and pulses with its price & quantity over the two years
2014 January & 2014 June.35Taking the below information , the index number will
be calculated by weighted method.

COMMODITY PRICE (2014) QUANTITY(2014) PRICE (2014) QUANTITY(2014)

CEREALS 122.4 12.35 124 6.59
NON- 117.3 1.37 116.1 1.13
ALCOHOLIC
BEVERAGES
PREPARED 124.8 5.56 127.6 5.54
MEALS &
SNACKS
PULSES & 116.3 2.95 120.1 1.73
PRODUCTS

35
http://pib.nic.in/newsite/PrintRelease.aspx?relid

18
Solution:

Commodity 2014(Jan) 2014(June) p1qo poqo p1q1 poq1

po qo p1 q1

CEREALS 122.4 12.35 124 6.59 1531.4 1511.64 817.16 806.6

1

NON- 117.3 1.37 116.1 1.13 159.05 160.70 131.19 132.5

ALCOHOLIC 4
BEVERAGES

PREPARED 124.8 5.56 127.6 5.54 709.45 693.88 706.90 691.3

MEALS & 9
SNACKS

PULSES & 116.3 2.95 120.1 1.73 354.29 343.08 207.77 201.1
PRODUCTS 9

2754.19 2709.3 1863.02 183

1.73

Laspeyre's price index = [PiW0] / [P0W0] X 100

P01=( 2754.19/ 2709.3) X 100

P01=101.65

19
 Paasche price index = [PiWi] / [P0Wi] X 100

P01=( 1863.02/1831.73) X 100

P01=101.70

Laspeyre's Index Paashe's P01=P1qo/PoqoP1q1/Poq1100

P01= 2754.19/ 2709.31863.02/1831.73100

P01=(1.0165) (1.0170) 100

P01=1.0167 100

P01=101.67

The analysis of the above problem shows that there has been an increase by 1.67%, which is not
a substantial increase, this indicates that there has been fairly equal amount of consumption and
also the variation in the price has also not been much that is why the overall expenditure has
remained fairly the same and as a result not much variation can be seen in the index number.

20
REFERENCES:

BOOKS:

S.P.Gupta,Statistical Methods,Sultan Chand & Sons.,2014

WEB SOURCES:

http://download.nos.org/srsec311new/L.No.38.pdf
http://pib.nic.in/newsite/PrintRelease.aspx?relid
http://sol.du.ac.in/mod/book/view.php?id=1656&chapterid=1675
http://www.emathzone.com/tutorials/basic-statistics/index-numbers-and-types-of-index-
numbers.html
https://economics-the-economy.knoji.com/uses-and-limitations-of-index-numbers/.
Labour Bureau, Ministry of Labour & Employment, Government of India.RBI Monthly
Bulletin November 2012
mospi.nic.in/mospi_new/site/PressRelease.asp

21