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4/23/12
CHAPTER 5:
INDEX NUMBER
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Introduction:

Index number is a statistical tool used to measure changes

in average price, quantity, value, air condition and
economic health of a country for a stated period of time.

Index numbers are widely used around the world to

describe the economic situation of a country. This includes
stock market performance, inflation, import and export
growth, industrial and agriculture productivity and many
others.

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).
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The Construction of Index Number
Number of item

An index number may include a group of items or one

item.

In a group of large data, one item, or a group of

selected items, will be
used in the index number.
Base year

Base year is the year that is used to compare its value

with the values
of the other years. Index number for the base year is
always 100.

The selection of base year is normally done based on

several criteria.
First, the base year should not be too far from the year
that index is
computed. Conditions and factors may have changed if
the base year
is too far from the current period. Technology and
consumer taste may
have changed if the time difference is too long.
Secondly, base year
should be a normal and stable year with no drastic
economic changes.
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Current year

The given year whose values are to be compared is

called a current
year (or current period).
Weight

Weighted index numbers are accompanied by weights.

A weight is a
value that shows the importance of an item in the index
number.

An item of more importance is given a higher weight

while an item of
less importance is given a lower weight.
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Price Index and Quantity Index

Price index is the percentage change in prices of an item or

a group of items in a given period with respect to the price
of the same item or items in the base year.

Quantity index is the percentage change in quantities in a

given period with respect to the quantities of the same item
or items in the base year.

There are two categories of index number; unweighted

indices and weighted indices.
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INDEX
NUMBER
Unweighte
d
Weighted
Simple
relative
Simple
aggregate
Simple
average of
relative
Aggregate
index
Laspeyres
index
Paasches
index
Fishers ideal
index
Marshall Edgeworth

index
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Construction of simple index numbers
Simple Relative

A simple price or quantity relative is the ration of the price

or quantity of a single commodity in a given period to its
price or quantity in the base period. The price relative is
given by:
P1 = Current year
price
P0 = Base year price

The quantity relative is given by:

q1 = Current year quantity
q0 = Base year
quantity
100
0
1
x
P
P
I
100
0
1
x
q
q
I
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Example 1:
Type of Food Price per kg (RM)
2000 2005
A 0.60 0.65
B 1.80 2.20
C 1.20 1.40
Taking 2000 as the base year, find the price relatives of type of food.
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A =
B =
3 . 108 100
60 . 0
65 . 0
x
(Price relative shows that price of food A has increased by 8.3% compared to the
base year 2000)
2 . 122 100
80 . 1
20 . 2
x
(Price relative shows that price of food B has increased by 22.2% compared to
the base year 2000)
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C =
67 . 116 100
20 . 1
40 . 1
x
(Price relative shows that price of food C has increased by 16.67%
compared to the base year 2000)
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Example 2:
Taking 2003 as the base year, find the quantity relatives
(quantity index) of sales from 2004 to 2006.
Year 2003 2004 2005 2006
No. of paper 400 550 800 1600
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Solution:
Year Quantity relatives (2003 = 100)
2004
2005
2006
50 . 137 100
400
550
x
00 . 200 100
400
800
x
00 . 400 100
400
1600
x
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Simple Average of Relative Index

Simple average of relative index compares the overall

changes for a group of commodities or items under
consideration.
Price relatives:
Quantity relatives:

,
_

100
1
0
1
x
P
P
n
I

,
_

100
1
0
1
x
q
q
n
I
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Example 3:
Type of Food Price per kg (RM)
2000 2005
A 0.60 0.65
B 1.80 2.20
C 1.20 1.40
Taking 2000 as the base year, find the simple average of relative index
of type of food.
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Solution:
1
]
1

,
_

,
_

,
_

100
20 . 1
40 . 1
100
80 . 1
20 . 2
100
60 . 0
65 . 0
3
1
x x x I
( ) 67 . 116 2 . 122 3 . 108
3
1
+ + I
I = 115.74
Price simple average of relative index shows that price of food has
increased by 15.74% compared to the base year 2000
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Example 4:
Calculate the average of relative quantity index of three
types of foods A, B and C for 2005. Taking 2003 as the base
year.
Type of Food Quantity sold (kg)
2003 2005
A 600 650
B 1800 2200
C 1200 1400
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Solution:
Average of relative quantity index,
Type of food Relative quantity index
A
B
C
33 . 108 100
600
650
x
22 . 122 100
1800
2200
x
67 . 116 100
1200
1400
x
( ) 67 . 116 22 . 122 3 . 108
3
1
+ + I
I = 115.74
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Simple Aggregate Index
Simple Aggregate Price Index:
100
0
1
x
P
P
I

P0 and P1 are sum of all commodity prices in the base year and the given
year respectively.
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Simple Aggregate Quantity Index:
100
0
1
x
q
q
I

q0 and q1 are sum of all commodity prices in the base year and the given
year respectively.
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Example 5:
Type of Food Price per kg (RM)
2000 2005
A 0.60 0.65
B 1.80 2.20
C 1.20 1.40

60 . 3
0
P
25 . 4
1
P
Taking 2000 as the base year, find the simple aggregate index of type of
food.
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Solution:
25 . 4
60 . 3
1
0

P
P
06 . 118 100
60 . 3
25 . 4
x I
Price simple aggregate index shows that price of food has
increased by 18.06% compared to the base year 2000
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Example 6:
Calculate the simple aggregate quantity index for 2005 for
three types of machine A,B and C with 2000 as the base year.
Type of machine Sales Quantity
2000 2005
A 300 600
B 500 800
C 900 1500

1700
0
q

2900
1
q
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Solution :
2900
1700
1
0

q
q
59 . 170 100
1700
2900
x I
Quantity simple aggregate index shows that price of food has
increased by 70.59% compared to the base year 2000
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Weighted Aggregate Index

The weighted Aggregate Index is calculated when the

importance of each item needs to be included.
A weighted price index:
A weighted quantity index:
100
0
1
x
w P
w P

100
0
1
x
w q
w q

P1 = current year price

P0 = base year price
w = weight
q1 = current year quantity
q0 = base year quantity
w = weight
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Example 7:
Type of Food Weight Price per kg (RM)
2000 2005
A 6 0.60 0.65
B 4 1.80 2.20
C 2 1.20 1.40
Taking 2000 as the base year, find aggregate price index for
2005.
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Solution:
100
0
1
x
w P
w P

P1w P0w
0.65 x 6 = 3.9 0.60 x 6 = 3.60
2.20 x 4 = 8.80 1.80 x 4 = 7.20
1.40 x 2 = 2.80 1.20 x 2 = 2.40

50 . 15
1
w P

20 . 13
0
w P
42 . 117 100
20 . 13
50 . 15
x
The price of type of food have increased by 17.42% in
2005 compared to 2000
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Example 8:
Calculate the weighted aggregate quantity index for 2009
using 2006 as the base year
Type of
food
Weight Quantity
2006
Quantity
2009
A 3 15 25
B 4 20 30
C 5 50 40
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Solution:
100
0
1
x
w q
w q

q1w q0w
25 x 3 = 75 0.60 x 6 = 3.60
30 x 4 = 120 1.80 x 4 = 7.20
40 x 5 = 200 1.20 x 2 = 2.40

395
1
w q

375
0
w q
33 . 105 100
375
395
x
The quantity of type of food have increased by 5.33% in 2009
compared to 2006
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Laspeyres index and Paasches index

Two types of weight indices are commonly used.

Laspeyres price index uses the base year quantities as the

weight.

Paasches price index uses the current year quantities as

the weights.
Laspeyres price index = p1q0 x 100
p0q0
Paasches price index = p1q1 x 100
p0q1
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Laspeyres quantity index and Paasches quantity index:
Laspeyres quantity index = q1 p0 x 100
q0 p 0
Paasches quantity index = q1 p1 x 100
q0 p 1
P1 = current year price
P0 = base year price
q1 = current year quantity
q0 = base year quantity
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Example 9:
Raw
material
Price per kg (RM) Quantity kg)
2005 2007 2005 2007
A 4.00 5.00 4000 3500
B 6.00 7.00 2750 3000
C 5.00 4.00 2000 3000
D 8.00 9.00 1000 2000
Using 2005 as the base year, calculate
a) Laspeyres price index for year 2007
b) Paasches price index for 2007
c) Laspeyres quantity index for 2007
d) Paasches quantity index for 2007
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Solution:
a) Laspeyresprice index for year 2007
p1q0 p0q0
20 000 16 000
19 250 16 500
8 000 10 000
9 000 8 000
= 56 250 = 50 500
= 56 250 x 100
50 500
= 111.39
Laspeyres price index of 111.39 indicates that prices of raw materials in 2007
have increased by 11.39% compared to 2005.
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b) Paasches price index for 2007
p1q1 p0q1
17500 14000
21000 18000
12000 15000
18000 16000
= 68500 = 63000
= 68500 x 100
63000
= 108.73
Paasches price index of 108.73 indicates that prices of raw materials
in 2007 have increased by 8.73% compared to 2005.
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c) Laspeyres quantity index for 2007
q1p0 q0p0
14 000 16 000
18 000 16 500
15 000 10 000
16 000 8 000
= 63 000 = 50 500
= 63 000 x 100
50 500
= 124.75
Laspeyres quantity index of 124.75 indicates that consumption quantity has
increased by 24.75%.
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d) Paasches quantity index for 2007
q1p1 q0p1
17 500 20 000
21 000 19 250
12 000 8 000
18 000 9 000
= 68 500 = 56 250
= 68 500 x 100
56 250
= 121.78
Paasches quantity index of 121.78 indicates that consumption quantity
has increased by 21.78%.
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Marshall Edgeworth and Unggul Fisher Numerical Indicator
Marshall-Edgeworth price index:
P1 = current year price
P0 = base year price
q1 = current year quantity
q0 = base year quantity
( )
( )
100
1 0 0
1 0 1
x
q q P
q q P

+
+
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Unggul Fisher/Fishers Ideal Price Index:
100
1 0
1 1
0 0
0 1
x
q P
q P
q P
q P

,
_

,
_

P1 = current year price

P0 = base year price
q1 = current year quantity
q0 = base year quantity
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Example 10:
Company Price (RM) Quantity
2003 2005 2003 2005
A 0.80 0.90 5000 10 000
B 1.80 1.75 20 000 15 000
C 2.40 2.85 4000 60 000
Taking 2003 as the base year, find
a) Marshall-Edgeworth price index for 2005
b) Fisher Ideal Price Index for 2005
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Solution:
a)
0.90 (5000 + 10 000) = 13 500 0.80 (5000 + 10 000) = 12 000
1.75 (20 000 + 15 000) = 61 250 1.80 (20 000 + 15 000) = 63 000
2.85 (4 000 + 60 000) = 182 400 2.40 (4 000 + 60 000) = 153 600
( )
1 0 1
q q P +
( )
1 0 0
q q P +
( )

+ 257150
0 0 1
q q P
( )

+ 228600
0 0 1
q q P
49 . 112 100
228600
257150
x
The price have increased by 12.49% in 2005 compared to
2003
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b)
0.90 (5000) = 4500 0.80 (5000) = 4000
1.75(20 000) = 35000 1.80 (20 000) = 36000
2.85(4000) = 11400 2.40 (4000) = 9600
0 1
q P
0 0
q P

50900
0 1
q P
49600
0 0
q P
0.90 (10000) = 9000 0.80 (10000) = 8000
1.75 (15000) = 26250 1.80 (15000) = 27000
2.85 (60000) = 171000 2.40 (60000) = 144000
1 1
q P
1 0
q P

206250
1 1
q P

179000
1 0
q P
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The price have increased by 8.73% in 2005 compared to
2003
( )( )
73 . 108
100 152 . 1 026 . 1
100
179000
206250
49600
50900

,
_

,
_

x
x