Quantitative Aptitude & Business Statistics

INDEX NUMBERS

Index Numbers
An index number is a specialized average

designed to measure the changes in a

variable with respect to time
,geographical location or characteristics
such as income, profession etc.

Quantitative Aptitude & Business Statistics: Index Numbers

Features of Index numbers

specialized averages .
measure the net change in a group of

related variables.
measures the effect of changes over a
period of time.

Quantitative Aptitude & Business Statistics: Index Numbers

Uses of Index Numbers

1. A guide to business policy.
2. Indices of industrial production are

useful as they are the indicators of

business environment .
3. At times, index numbers can be
combined into one series that may be
relevant to ones own business.

Quantitative Aptitude & Business Statistics: Index Numbers

4. Very helpful in finding out whether a

business firms sales are increasing in

physical volume as opposed to rupee
value.
5. Used to adjust wages or salaries on
account of rising prices or inflation.
6. 6.Index numbers can be used for
providing
incentive
to
efficient
workers.
Quantitative Aptitude & Business Statistics: Index Numbers

Problems in Index Number Construction

1. Selection of a Base Year

2. Type of Formula
3. Selection of Weights

4. The Data for Index Numbers

Quantitative Aptitude & Business Statistics: Index Numbers

Types of Price Index Numbers

Simple Index Numbers
Composite Index Numbers
Simple Average of Price Relatives
Weighted Relative Price Index Numbers

Quantitative Aptitude & Business Statistics: Index Numbers

Price Relatives
Price relatives are helpful in

understanding and interpreting

changing economic and business
conditions over time.

Quantitative Aptitude & Business Statistics: Index Numbers

Price Relatives
A price relative shows how the current

price per unit for a given item

compares to a base period price per
unit for the same item.
A price relative expresses the unit
price in each period as a percentage
of the unit price in the base period.

Price in period t
Price relative in period t =
(100 )
Base period price

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Aggregate Price Indexes

An aggregate price index is developed

for the specific purpose of measuring

the combined change of a group of
items.

An unweighted aggregate price index

in period t,

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It

Pit

(100 )

i0

Where,
Pit = unit price for item i in period t
Pi 0 = unit price for item i in the base period

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Laspyres Price index number

P01

pq

p q

1 0

100

0 0

Where
P1=Price of the current year
P0=Price of the base year
qo=Quantity of the base year

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Paachees Price index number

P01
Where

pq

p q

1 1

100

0 1

P1=Price of the current year

P0=Price of the base year
q1=Quantity of the current year

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Dorbish-Bowleys Price index number

pq
LP p q

1 0

pq

p q

1 1

P01
100
2
2
Where,
L=Laspyres Price index number
P=Paachees Price index number
0

0 1

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Marshall-Edgewothss Price index

number

P01

q1 p1

q1 p 0

100

Where
P1=Price of the current year
P0=Price of the base year
qo=Quantity of the current year
q1=Quantity of the current year

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Fisher's Price index number

P01 L P
p01

pq pq
p q p q
1 0

1 1

0 0

0 1

100

Where
L = Laspyres Price Index number
P = Paachees Price Index number

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17

Kellys Price index number

P01

pq

100
p q
1

q1 q 2
q
2

Where

P1=Price of the current year

P0=Price of the base year
q=Quantity of the current/base year

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Weighted Price index number

If Arithmetic Mean is used

P01

PV

100
V
p1
P
100
p0

V=P0q0

Where
P1=Price of Current Year
P0=Price of base year

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Weighted Price index number

If Geometric Mean is used

V log P
P01 Anti log
100
V

Where

P1=Price of Current Year

P0=Price of base year
V=P0q0
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Quantity Indexes
An index that measures changes in
quantity levels over time is called a
quantity index.
Probably the best known quantity
index is the Index of Industrial
Production.

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21

 A weighted aggregate quantity index is

computed in much the same way as a

weighted aggregate price index.

It

Q w
Q w
it

i0

(100)

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22

Tests of adequacy of Index numbers

1.Unit test
2.Time reversal test
3.Factor reversal test
4.Circular test

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23

Unit test
The unit test requires that the formula

for constructing an index should be

independent of the units in which ,or
for which ,prices and quantities are
quoted. All formulae except the simple
(unweighted )aggregate index formula
satisfy this test.

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24

Time Reversal Test

A method satisfies time reversal test if

it gives P01 * P10 = 1 where P01 is the

price index number for the current
year with the base year 100 and P10 is
the index number of the base year,
taking current year as the base, both
the indices without the factor 100.

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25

Methods which satisfy

the time reversal test
The Fishers ideal index number.
Simple geometric mean of price

relatives.
Aggregate with fixed weights.
Marshal-Edge worth Price index
number.

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26

Factor Reversal Test

A method satisfies factor reversal test if

it gives

p 01 q 01

p q

p q

1 1

where P01 is the price index for the

current year (without the factor 100)
and Q01 is the quantity index for the
current year (without the factor 100).

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27

 Fishers index number only satisfies the

factor reversal test.

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Circular Test
There is another test with respect to

index numbers. This is known as the

circular test. It is an extension of the
time reversal test. Symbolically, the
circular test may be written as
P01 .P12 . P23 Pn-1n .Pn0 = 1
Circular test satisfies the simple
geometric mean of price relatives and
weighted aggregate of fixed weights.

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Chain base index numbers

Chain base index numbers is one in

which the figures for each are first

expressed as percentage of the
preceding year. The percentage are
chained together by successive
multiplication to form a series of chain
index, in chain base year index method
the base year changes from year to
year .
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 Link relative=

X100

Current Year Price index

Immediate preceding previous
Year Price relative

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Advantages of Chain Base Index

Numbers
1. The

chain base index numbers

facilitate the introduction of new items
as also the deletion of absolute items
in a smooth manner.
2. In business, often, comparisons are
made in the current period with the
immediately preceding period rather
than any distant period in the past.

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32

Limitations of Chain Base Index

Numbers
1. If the data for any one year are not

available, the chain index number for

subsequent
period
cannot
be
computed.
2. If an error in the computation of any
link relative takes place, then such an
error gets compounded and the entire
series gives a distorted picture.

Quantitative Aptitude & Business Statistics: Index Numbers

33

3)to

splice

two

overlapping

indices

together;
4) construct a chain index and
5)facilitate comparison with some date
of special interest.

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34

Splicing and Shifting the Base of Index

Numbers
When two or more overlapping
series of index numbers are combined
into one series, then this process is
known as splicing.

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35

Splicing
Splicing is a technique of linking two

or more index number series with the

same items and a common
overlapping year but with different
base period in order to form a
continuous series. Splicing may be
forward or backward

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36

Splicing

Index no. of old

series

Index
no. of
New
series

Forward
Splicing

={100/Overlapping
index number of old
series }*Given index
of No .of old series

No
change

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Splicing

Backward
Splicing

Index
no. of
old
series
No
change

Index no. of New

series

={Index number of
old
series/100}*Given
index No.of new
series

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Shifting the Base Year

At times it is preferable to shift the

base of an existing index on account

of several reasons.

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39

These reasons are:

1) to make the base more recent, which

will increase its utility;

2) to ensure better comparison with

some other index that is available on

some other base;
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 New index Number using new base=

Old Index number using old base

Index number Corresponding new base
year

Quantitative Aptitude & Business Statistics: Index Numbers

X100

41

Deflating Prices and Incomes

The process of adjusting prices and
incomes by a price index and
expressing them in terms of base-year
rupees is called deflating prices and
income.
1
Purchasing power of Money =
Price index
number
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42

 Money wage=
Money wage index =

Moneywage
100
Pr ice' index
Re alwage
100
Moneywage ' ofthe ' baseyear '

Real Wage index = Moneywage' index

100
Pr ice' index

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43

Caution in using Index Numbers

If the index numbers are defective on

account of one or more reasons, their

interpretation will lead to drawing of
wrong inferences from them. Even if
index numbers are constructed on
sound statistical principles, but we
interpret them in the wrong manner,
our conclusions will be wrong.
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44

 As

far as construction of index

numbers is concerned, it is the domain
of the statistician who has to ensure
that the index numbers are based on
sound statistical principles. As regards
proper use of index numbers, it is the
user who should ensure that he
interprets index numbers properly
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45

Limitations of Index Numbers

Index numbers are based on sample data.
In case sample size is extremely limited
and its selection is faulty in the sense
that the sample units have not been
selected randomly, index numbers will
give wrong figures.

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46

At times, index numbers can be

manipulated by those who are in
authority. This is purposely done to
support their viewpoint.

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47

A number of formulae can be used in

index number construction. These will
give different results. One who is using
the index should know a little more about
different formulae and their effect on the
magnitude of the index.

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48

Limitations of Index Numbers

Index numbers with the same base and
items are useful for a short period. One
has, therefore, to ensure that index does
not use a very remote year as the base.
One who is interpreting an index must be
familiar with general aspects of the
economy and the factors relevant in this
regard.

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49

As we know, our indices are of prices and

quantities. The question is: does our
index reflect a change in the quality of a
product or item?
Apart from quality changes, there are
other aspects, that are pertinent while
we are interpreting index numbers. We
have to ask whether the weights
assigned
to
different
items
are
appropriate.
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50

Some Important Price Indexes

Consumer Price Index (CPI)

Primary measure of the cost of living .

Based on 985 items including food,
housing, clothing, transportation, and
medical items.
Weighted aggregate price index with fixed
weights derived from a usage survey.
Published monthly by the Bureau of
Statistics.
Its base period is 2001-02 with an index of
100.
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51

Methods of Constructing Consumer

Price index
Aggregate Expenditure method
Family budget method
Aggregate expenditure method is a

weighted aggregated price index

where weights are the base period
quantities. (Laspyres Index number)

p q

CPI
p q
1

100

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 Family budget method is a weighted

aggregated of price relatives method

where index is obtained by taking the
average of weighted price relatives and
the value weights are (P0q0) are used
PV

CPI
V

P1
100
P0

V P0 .Q 0

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53

Some Important Price Indexes

Producer Price Index (PPI)

Measures the monthly changes in prices in

primary markets .
Used as a leading indicator of the future
trend of consumer prices and the cost of
living.
Covers raw, manufactured, and processed
goods at each level of processing.

Quantitative Aptitude & Business Statistics: Index Numbers

54

Includes the output of manufacturing,

agriculture, forestry, fishing, mining, gas and
electricity, and public utilities.
Weighted average of price relatives using the
Laspeyres method.

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55

Problem
From the following data compute the

Fishers Price index number.

Commodity Base Year

Current Year
Price Quantity Price Quantity
A
B
C
D

1
2
3
4

6
7
8
9

5
4
3
2

Quantitative Aptitude & Business Statistics: Index Numbers

8
7
6
5
56

Fishers Index number is calculated by

P01 L P
p 01

p q p q
p q p q
1 0

1 1

0 0

0 1

100

100 96

100
80 60
9600

100
4800
2 100
141.42
Quantitative Aptitude & Business Statistics: Index Numbers

57

Problem

Calculate chain indices and fixed

base indices with 2000 as base from

the following data
Year

2000 2001 2002

Price of item
Per .Kg

20

25

30

Quantitative Aptitude & Business Statistics: Index Numbers

2003

2004

45

63

58

Year

Price of
Rice
(Rs. per Kg)

2000

20

FBIN
100

2001
2002
2003
2004

25
30
45
63

(25/20)*100=125
(30/20)*100=150
(45/20)*100=225
(63/20)*100=315

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Problem
Convert the following Link relatives

in to price relatives taking 2000 as

base
Year
Link
Relative

2000

2001

2002

2003

2004

80

125

120

150

140

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Link
relatives
(LRs)

Price Relatives
(PRs)

2000

80

100

2001
2002
2003
2004

125
120
150
140

(125/100)*100=125
(120/100)*125=150
(150/100)*150=225
(140/100)*225=315

Year

Quantitative Aptitude & Business Statistics: Index Numbers

6
1

Problem
From the following data compute the

Consumers Price index number.

(Aggregate Expenditure method
Commodity
A
B
C
D

Base Year
Price Quantity
1
2
3
4

6
7
8
9

Current Year
Price Quantity
5
4
3
2

Quantitative Aptitude & Business Statistics: Index Numbers

8
7
6
5

62

V p 0q 0
6
14
24
36

Price Relative=

PV

P1
100
P0
500
200
100
50

80

3000
2800
2400
1800
10000

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PV

CPI
V
1000

80
125
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Problem
From the following data compute the

Consumers Price index number.

(Family budget method
Commodity

A
B
C
D

Base Year

Current Year

Price Quantity

Price Quantity

1
2
3
4

6
7
8
9

5
4
3
2

Quantitative Aptitude & Business Statistics: Index Numbers

8
7
6
5
65

pq

CPI
p q

1 0

100

0 0

100

100
80
125

Quantitative Aptitude & Business Statistics: Index Numbers

66

1.
of
(a)
(b)
(c)
(d)

The best average in the construction

index number is
median
geometric mean
mode
arithmetic mean

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1.
of
(a)
(b)
(c)
(d)

The best average in the construction

index number is
median
geometric mean
mode
arithmetic mean

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68

2.The paaschees index number is based

on
(a) base year quantities
(b) current year quantities
(c) average of current and base years
(d) none of these

6
9

2.The paaschees index number is based

on
(a) base year quantities
(b) current year quantities
(c) average of current and base years
(d) none of these

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70

3.Fishers ideal index is the

(a) arithmetic mean of Laspyres and
Paasches index
(b)median of Laspyres and Paasches
index
(c) geometric mean of Laspyres and
Paasches index
(d) none of these
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71

3.Fishers ideal index is the

(a) arithmetic mean of Laspyres and
Paasches index
(b) median of Laspyres and Paasches
index
(c) geometric mean of Laspyres and
Paasches index
(d) none of these
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4.The circular test is satisfied by

(a) simple aggregate index
(b) Paasches index
(c) Laspyres index
(d) Fishers index

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4.The circular test is satisfied by

(a)
(b)
(c)
(d)

simple aggregate index

Paasches index
Laspyres index
Fishers index

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74

5.The index used to measure changes in

total money value called
(a) price index
(b) quantity index
(c) value index
(d) none of these

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5.The index used to measure changes in

total money value called
(a) price index
(b) quantity index
(c) value index
(d) none of these

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6.Fishers ideal index number satisfied by

(a)
(b)
(c)
(d)

circular test
time reversal
factor reversal test
both (b) and (c)

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6.Fishers ideal index number satisfied by

(a)
(b)
(c)
(d)

circular test
time reversal
factor reversal test
both (b) and (c)

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78

7.The weights used in quantity index are

(a)
(b)
(c)
(d)

percentage of total quantity

average quantity
prices
none of these

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79

7.The weights used in quantity index are

(a)
(b)
(c)
(d)

percentage of total quantity

average quantity
prices
none of these

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80

8.Symbolically Pon x P no = 1 stands for

(a)
(b)
(c)
(d)

circular test
factor reversal test
time reversal test
none of these

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81

8.Symbolically P on x P no = 1 stands for

(a)
(b)
(c)
(d)

circular test
factor reversal test
time reversal test
none of these

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82

9.Fixed base index numbers and chain

indexes are
(a) same
(b) different
(c) equal to 100
(d) none of these

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9.Fixed base index numbers and chain

indexes are
(a) same
(b) different
(c) equal to 100
(d) none of these

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84

10.Weighted average of price relatives

index using base year value as weighted
is called
(a) Laspyres index
(b) Paasches index
(c) Bowleys index
(d) Fishers index

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85

10.Weighted average of price relatives

index using base year value as weighted
is called
(a) Laspyres index
(b) Paasches index
(c) Bowleys index
(d) Fishers index

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86

11. A time series is deflated

by
current value
using the following
formulae
price index
of current year
(b) Deflated value =

current value
price index of base year

(a) Deflated value =

(c) Deflated value =
(d) none of these

current value
price index of previous year

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87

11. A time series is deflated

by
current value
using the following formulae
price index of current year
(b)

(a)
(c)

Deflated value =

current value
price index of base year

Deflated value current

=
value

Deflated value =

price index of previous yea

(d) none of these
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88

12. Shifted price index is calculated as

original price index

*100
(a)
price index of year on which it is to obtain

price index of year on which it is to be shifted

(b)
x 100
original price index
(c) original price index chain index of current year

price index of year on which it is to be obtained

(d) none of these
Quantitative Aptitude & Business Statistics: Index Numbers

x 100

89

index
12.Shifted priceoriginal
indexprice
is calculated
as 100
(a)
price index of year on which it is to obtain

(b)

price index of year on which it is to be shifted

x 100
original price index

(c) original price index chain index of current year

price index of year on which it is to be obtained

x 100

(d) none of these

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13.Atechnique to link two or

more index number Series
is known as
A) Splicing
B) Base shifting
C) Deflating
D) None of these
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13.Atechnique to link two or more index

number Series is known as
A) Splicing
B) Base shifting
C) Deflating
D) None of these

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14.The Cost of Living index always

A) Weighted index
B) Price index
C) Quantity index
D) None of these

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14.The Cost of Living index always

A) Weighted index
B) Price index
C) Quantity index
D) None of these

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15.Marshall -Edge worth Formula does

satisfy ----test
a) Time reversal test

b) Factor reversal test

c) Circular test
d) none

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15.Marshall -Edge worth Formula does

satisfy ----test
a) Time reversal test

b) Factor reversal test

c) Circular test
d) none

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96

16. If the old series is connected, with the

new series of index numbers it is know
as
A) Backward splicing
B) Base shifting
C) Forward splicing
D) None of the above

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97

16. If the old series is connected, with the

new series of index numbers it is know
as
A) Backward splicing
B) Base shifting
C) Forward splicing
D) None of the above

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98

 17.If with a rise of 10% in prices the

salaries are increased by 20%, the real

salary increases by
A) 10%
B) More than 10%
C) 20%
D) Less than 10%

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 17.If with a rise of 10% in prices the

salaries are increased by 20%, the real

salary increases by
A) 10%
B) More than 10%
C) 20%
D) Less than 10%

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100

 18. The ______ is satisfied when

P ab P bc Pca = 1
A) Time reversal test
B) Factor reversal test
C) Circular test
D) Unit test

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101

 18. The ______ is satisfied when

P ab P bc Pca = 1
A) Time reversal test
B) Factor reversal test
C) Circular test
D) Unit test

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102

 19. The total sum of the values of a given

year divided by the sum of the values of

the base year is
A) Price index.
B) Quantity index
C) Value index.
D) None of these.

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103

 19. The total sum of the values of a given

year divided by the sum of the values of

the base year is
A) Price index.
B) Quantity index
C) Value index.
D) None of these.

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 20. Fisher's Ideal formula does not

satisfy_________ test.
A) Circular test
B) Unit test
C) Time Reversal test
D) None of these

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105

 20. Fisher's Ideal formula does not

satisfy_________ test.
A) Circular test
B) Unit test
C) Time Reversal test
D) None of these

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106

 21. If with rise of 10% in prices the

wages are increased by 20%. Find the

percentage of real wage increase
A) 109.29%
B) 9.09%
C) 9.29%
D) None of these

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107

 21. If with rise of 10% in prices the

wages are increased by 20%. Find the

percentage of real wage increase
A) 109.29%
B) 9.09%
C) 9.29%
D) None of these

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108

 22. The price level of a country in a

certain year has increased 20% over the

base period. The Index number is
_____________
A) 20
B) 120
C) 220
D) None of these
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109

 22. The price level of a country in a

certain year has increased 20% over the

base period. The Index number is
_____________
A) 20
B) 120
C) 220
D) None of these
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110

 23. The consumer price index is an

example of a
A) Laspeyres index
B) Paasches index
C) Simple aggregate price index
D) Base year price

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111

 23. The consumer price index is an

example of a
A) Laspeyres index
B) Paasches index
C) Simple aggregate price index
D) Base year price

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112

 24. The base year is

A) Is the reference year from which

changes in the index are measured
B) Is always last year

C) Is the first year the index is created

D) Is the current year the index is created

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113

 24. The base year is

A) Is the reference year from which

changes in the index are measured
B) Is always last year

C) Is the first year the index is created

D) Is the current year the index is created

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114

Index Numbers

THE END