Composite Price Index

Unweighted Aggregative method

Unweighted Average of Relatives method

Weighted Aggregative Method

Paasche IndexLaspeyres Index

Fisher Index

Weighted Average of Relatives Method

• Consumer

Price Index (CPI)

• Simple relative index

– for price

– for quantity

What are index numbers?

• Index numbers:– are time series that focus on the relative change

in a count or measurement over time.– express the count or measurement as a percentage

of the comparable count or measurement in a base period.

• An index numberindex number is a statistical value that measures the change in a variable with respect to time

• Two variables often considered in this analysis are priceprice and quantityquantity

Applications of Index Numbers in Business and Economics

• A price index shows the change in the price of a commodity or group of commodities over time.

• A quantity index shows the change in quantity of a commodity or group of commodities used or purchased over time.

• A value index shows a change in total Rs. value (price • quantity) of a commodity or group of commodities over time.

Used to compare:

• Prices or Quantity

Can be utilised as:

• some measure of the change in things such as ‘the cost of goods and services’

Simple index numbers

• Index numbers that are constructed from a single item only

• Definitions used for all index numbers:– Current period = the period for which you wish

to find the index number

– Base period = the period with which you wish to compare prices in the current period

Price relative

• The price relative of an item is defined as:

o

n

p

prelativePrice

Where:pn = price in current periodpo = price in base period

Current period and base period

• Current periodCurrent period can be any period at all

• Base periodBase period choice often depends on economic factors:

– it should be a ‘normal’ period with respect to the relevant index

– it should not be chosen too far in the past

Simple price index

• Price relative index provides a ratio that indicates the change in price of an item from one period to another.

• Simple price index is a common method of expressing this change as a percentage:

100 index price Simple o

n

p

p

Where:pn = price in current periodpo = price in base period

Example: Simple Relative Price IndexPrice Index Price Index

Year Price 1980 as base year 1990 as base year

1980 140 100.0 58.3

1985 195 139.3 81.3

1990 240 171.4 100.0

1995 275 196.4 114.6

Computation of index for 1985 (1980 as base year):

I PtP0

100 195140

100 139.3

Simple price indexThe simple price index finds the percentage change in the price of an item from one period to another.

– If the simple price index is more than 100, subtract 100 from the simple price index. The result is the percentage increase in price from the base period to the current period.

– If the simple price index is less than 100 subtract the simple price index from 100. The result is the percentage by which the item cost less in the base period than it does in the current period.

Index numbers• An index number is the ratio of two numbers expressed as a

percentage. • In order to calculate an index number, a base period needs

to be identified. Values in the current period are then compared to the base period.

• The index number for the base period is 100. The index number for the current period is then compared to 100.

• For example, an index number of 120 would represent a 20% increase in the item being measured from the base period to the period in question.