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Index number is a statistical tool used to
Chapter 5
Index Number
(Page 219)
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The Consumer Price Index measures the
changes in the price of consumer goods.
It is very important because any increase in this
index reflects the increase in living expenses
and the cost of living of the people.
Normally the comparison is on an annual basis.
The government monitors closely this index and
will take action to stabilise the price if it goes up
drastically.
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measure changes in average price, quantity,
value, air quality and economic health of a
country for a stated period of time.
Types of index numbers most commonly used
are price index, quantity index ,quality index and
value index.
The price index measures the amount of
changes in the price of certain goods or service
at a current period compared to a certain period
in the past (normally called base period). The
most popular price index is Consumer Price
Index (CPI).
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Index numbers can be divided into two
categories: unweighted index and weighted
index.
Unweighted indices include simple relative,
simple aggregate index and simple average of
relative index.
Weighted indices include weighted aggregate
index, Laspeyres index and Paasches index.
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Simple Relative (page 222) Example (pg 222)

A simple price relative is the ratio of the price of a Prices of petrol in 2014 and 2015 were RM2.30 and
single commodity in a given period to its price in the RM2.45 respectively. Taking year 2014 as the base
base period. year, find the price relative index for 2015.
If p0 and pt denote the commodity prices during the
base period and given period respectively, then the
price relative is given by
Pt
I= 100
P0
In the same way, quantity relative is defined as
follows:
qt
I= 100
q0

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Solution Simple Aggregate Index (pg 231)

p0 = RM2.30 and pt = RM2.45 Simple aggregate price index for a given year t is the
Price relatives total of commodity prices in year t as a percentage of
Pt 2.45 the total commodity prices in the base year.
I= 100 = 100
P0 2.30 This is an unweighted aggregate price index.
= 104.35 Simple aggregate price index
pt
I= 100
p0
This means that in 2015, the price of petrol was 104.5
per cent of the price in 2014, that is an increase of 4.5%. where p0 and pt are sum of all commodity prices in the
base year and the given year respectively.

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In the same way, simple aggregate quantity index is Example (pg 231)
given by
qt
Use the data in table to calculate the simple
I= 100
q0 aggregate price index for 2015 and 2016 taking
where qt and q0 are sum of all commodity 2014 as the base year.
quantities in the given year t and the base year Item 2014 2015 2016
respectively. Petrol 1.20 1.35 1.50
In this method, calculation is simple. However, its Diesel 0.60 0.70 1.00
weakness is that it does not take into account the Cooking Gas 1.00 1.20 1.60
relative importance of the various commodities.

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Solution: Example (pg 232)

Simple aggregate price index for 2016 with base Calculate the simple aggregate quantity index
year 2014 is: for 2016 for three types of washing machines X,Y
p t 1.50 + 1.00 + 1.60 and Z with 2014 as the base years as shown in
I= 100 = 100 = 146.42
p 0 1.20 + 0.60 + 1.00 the table.
Simple aggregate price index for 2015 with base Types of washing machine
Sales quantity
2014 2016
year 2014 is: X 300 600

I=
p t
100 =
1.35 + 0.7 + 1.20
100 = 116.07
Y 500 800
p 0 1.20 + 0.60 + 1.00 Z 900 1500

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Solution: Weighted Aggregate Index (pg 235)

In calculating simple average of relative index and simple
aggregate index, we assume all the commodities or items
are of equal importance and no weights are used. When
the importance of each item needs to be included, we will
have to calculate weighted index.
a) Weighted Price Index

I=
wp n
100
wp 0

b) Weighted Quantity Index

I=
wq n
100
wq 0

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c) Weighted Quality Index Example (pg 236)

I=
wy n
100
For the data given below, calculate the weighted
wy 0
aggregate price index for 2016 using 2014 as the
base year as shown.
Type of food Weight Price (2014) Price (2016)
A 3 1.50 2.00
B 5 2.80 3.20
C 8 5.00 6.00

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Solution: Laspeyres Index and Paasches Index (pg 237)

Weighted aggregate price index for 2016, These are two types of weighted index
commonly used.
I=
wp n
100 =
3(2.00) + 5(3.20) + 8(6.00)
100 Laspeyres uses the base year quantities as the
wp 0 3(1.50) + 5(2.80) + 8(5.00)
70
weights while Paasches uses the current year
= 100 = 119.66 quantities as the weights.
58.5

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Laspeyres price index =
100 Example (pg 237)
A company produces electrical components that
require four main raw materials. Table shows the price
Paasches price index =
100
and quantity required for each material.
Price per kg (RM) Quantity (kg)
Raw material
2014, 2016, 2014, 2016,
Laspeyres quantity index =
100
A 4.00 5.00 4,000 3,500
B 6.00 7.00 2,750 3,000
C 5.00 4.00 2,000 3,000
D 8.00 9.00 1,000 2,000
Paasches quantity index =
100

Using 2014 as the base year, calculate:

a) Laspeyres price index for year 2016.
b) Paasches price index for 2016.

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Solution:

End of Chapter 5

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