Illustration-1:

From the following data construct an index number for 2005 taking 2004 as base:
Commodity and Unit Price (Rs) 2004 Price (Rs) 2005
Butter(kg) 110 120
Cheese(kg) 75 80
Milk(lt) 13 13
Bread(l) 9 9
Eggs(doz) 18 20
Ghee(tin) 850 860

Solution:
Calculation of Price Index
Commodity and Unit Price (Rs) in 2004 Price (Rs) in 2005
Butter(kg) 110 120
Cheese(kg) 75 80
Milk(lt) 13 13
Bread(l) 9 9
Eggs(doz) 18 20
Ghee(tin) 850 860
∑P0=1075 ∑P1=1102

∑𝑃 1102
P01 = ∑ 1×100 = ×100 =102.51
𝑃0 1075

This means that as compared to 2004, in 2005 there is a net increase in price of commodities
included in the index to the extent.
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Illustration-2:
From the data of illustration 1, compute price index by simple average of price relatives method
based on (a) arithmetic mean and (b) geometric mean.
Sollution:
(a) Price index based on simple average of price relatives
Commodity and Unit Price (Rs) in 2004 Price (Rs) in 2005 𝑃1
× 100
𝑃0
(P0) (P1)
Butter(kg) 110 120 109.09
Cheese(kg) 75 80 106.67
Milk(lt) 13 13 100.00
Bread(l) 9 9 100.00
Eggs(doz) 18 20 111.11
Ghee(tin) 850 860 101.18
N =6 𝑃1
∑ × 100
𝑃0
= 625.05

𝑃
∑ 1 ×100 628.05
𝑃2
Price index = P01 = = = 104.67
𝑁 6
(b) Price index based on geometric means of price relatives:
Commodity and Price (Rs) in Price (Rs) in 2005 Price Relatives log P
Unit 2004 (P0) (P1) P

Butter(kg) 110 120 109.09 2.0378

Cheese(kg) 75 80 106.67 2.0280

Milk(lt) 13 13 100.00 2.0000

Bread(l) 9 9 100.00 2.0000

Eggs(doz) 18 20 111.11 2.0457

Ghee(tin) 850 860 101.18 2.0051

N =6 ∑ 𝑙𝑜𝑔𝑃
= 12.1166
 ∑ log 𝑃 12.1166
P01 =AL [ ] = AL [ ] = AL 2.01194 = 104.57
𝑁 6

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Illustration-3:
Construct index numbers of price form the following data by applying:
1) Laspeyre’s Method
2) Pasces’s Method
3) Bowley’s Method
4) Fisher’s Method
5) Marshall- Edge worth Method
Commodity 2004 2005
Price Quantity Price Quantity
A 2 8 4 6
B 5 10 6 5
C 4 14 5 10
D 2 19 2 10

Solution:
Calculation of various index
Commodity 2004 2005
Price Quantity Price Quantity P1Q0 P0Q0 P1Q1 P0Q1
P0 Q0 P1 Q1
A 2 8 4 6 32 16 24 12
B 5 10 6 5 60 50 30 25
C 4 14 5 10 70 56 50 40
D 2 19 2 10 38 38 23 26

∑ 𝑃1 𝑄0 ∑ 𝑃0 𝑄0 ∑ 𝑃1 𝑄1 ∑ 𝑃0 𝑄1
=200 =160 =130 =103

1) Laspeyre’s Method:
∑ 𝑃1 𝑄0 200
P01 =
∑ 𝑃0 𝑄0
× 100 = × 100 = 125
160
2) Pasces’s Method:
∑ 𝑃1 𝑄1 130
P01 =
∑ 𝑃0 𝑄1
× 100 = × 100 = 126.21
103

3) Bowley’s Method:
∑ 𝑃1 𝑄0 ∑ 𝑃1 𝑄1 200 130
+
∑ 𝑃0 𝑄0 ∑ 𝑃0 𝑄1 +
160 103 1.25+1.2621
P01 = × 100 = × 100 = × 100 = 125.605
2 2 2

4)Fisher’s Method:

∑ 𝑃 1 𝑄0 ∑𝑃 𝑄 200 130
P01 = √
∑ 𝑃 0 𝑄0
× ∑ 𝑃1𝑄1 × 100 = √160 × 103 × 100 = 125.6
0 1

5) Marshall- Edge worth Method:

∑ 𝑃1 𝑄0 + ∑ 𝑃1 𝑄1 200 + 130
P01 = × 100 = × 100 = 125.475
∑ 𝑃0 𝑄0 +∑ 𝑃0 𝑄1 160 + 103

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Illustration-7:
From the following data of the wholesale prices of wheat for the ten years. Contruct index
numbers taking 1995 as base. Also find link relatives.
Year Price of Wheat
(RS. Per 10kg)
1995 50
1996 60
1997 62
1998 65
1999 70
2000 78
2001 82
2002 84
2003 88
2004 90
Sollution:
Calculation of index numbers taking 1995 as base
Year Price of Wheat Index Number
(1995=100)
(RS. Per 10kg)
1995 50 100
1996 60 60
× 100 = 120
50
1997 62 62
× 100 = 124
50
1998 65 65
× 100 = 130
50
1999 70 70
× 100 = 140
50

2000 78 78
× 100 = 156
50
2001 82 82
× 100 = 164
50
2002 84 84
× 100 = 168
50
2003 88 88
× 100 = 176
50
2004 90 90
× 100 = 180
50
This means that from 1995 to 1996 there was 20 percent increase, from 1995 to 1997 there was 24
percent increase. If we are interested in finding out increase from 1995 to 1996, from 1995 to 1997,
1995 to 1998, we shall have to compute the chain indices.
Calculation of Link relatives
Year Price of Wheat Index Number
(RS. Per 10kg) (1995=100)
1995 50 100
1996 60 60
× 100 = 120
50

1997 62 62
× 100 = 103.3
60

1998 65 65
× 100 = 104.8
62
 1999 70 70
× 100 = 107.7
65

2000 78 78
× 100 = 111.4
70

2001 82 82
× 100 = 105.1
78

2002 84 84
× 100 = 102.4
82

2003 88 88
× 100 = 102.3
84

2004 90 90
× 100 = 180
88

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Illustration-10:
The following index numbers of price (1995= 100) are given:
Year Index
1995 100
1996 110
1997 120
1998 200
1999 400
2000 410
2001 400
2002 380
2003 370
2004 340
Shift the base from 1995 to 2004 and recast the index numbers.
Solution:
Index numbers with 1995 base (1995= 100)
Year Index Index Number
(1995=100) (2001=400)
1995 100 100
× 100 = 25
400
1996 110 110
× 100 = 27.5
400
1997 120 120
× 100 = 30
400
1998 200 200
× 100 = 50
400
 1999 400 400
× 100 = 100
400
2000 410 410
× 100 = 102.5
400
2001 400 400
× 100 = 100
400
2002 380 380
× 100 = 95
400
2003 370 370
× 100 = 92.5
400
2004 340 340
× 100 = 85
400
The new series with 2001 as base is obtained easily by diving each entry of the second column by
400, the index for 2001 and multiplying the ratio by 100
𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑓𝑜𝑟 1995 100
Index number for 1995 = × 100 = × 100 = 25
𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑓𝑜𝑟 2001 400

𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑓𝑜𝑟 1996 110

Index number for 1996 = × 100 = × 100 = 27.5
𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑓𝑜𝑟 2001 400

In a similar manner other indices can also be obtained.

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Illustration-12:
Following table gives the weekly wage of workers together with the price index numbers compute
the index numbers of real income and interpret them.
Year Weekly wages Price Index
(in RS)
1998 300 100
1999 340 160
2000 450 280
2001 460 290
2002 480 350
2003 570 420
2004 575 430

Solution:
Index number of real incomes
Year Weekly wages Price Index Real Wages Real Wages
Index
(in RS) (1998=100)
 1998 300 100 200 100
× 100 = 300
100
1999 340 160 340 70.83
× 100 = 212.5
160
2000 450 280 450 53.57
× 100 = 160.75
280
2001 460 290 460 52.87
× 100 = 158.62
290
2002 480 350 480 45.71
× 100 = 137.14
350
2003 570 420 570 45.24
× 100 = 137.71
420
2004 575 430 575 44.57
× 100 = 133.72
430
The index number of real wages has fallen from 100 in 1998 to 44.57 in 2004. In other words,
despite the fact that the weekly wage has increased from RS.300 in 1998 to Rs.575 in 2004, the
workers are not better off.
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Illustration-13:
Prices per unit of the items farming consumption bundle of an average middle-class family in two
periods and percentage of total family budget allocated to these items are given in the following
table:
Food Rent Clothing Fuel Misc.
Percent expenditure 35 15 20 10 20
Price (RS) in Period 0 1500 500 1000 200 600
Price (RS) in Period 1 1740 600 1250 250 900
Compute an appropriate index number and comment on the result.
Solution:
The appropriate index number here would be the consumer price index number.
Index number P0 P1 𝑃1 w Pw
× 100 = P
of 𝑃0
expenditures
Food 1500 1740 116 35 4060
Rent 500 600 120 15 1800
Clothing 1000 1250 125 20 2500
Fuel 200 250 125 10 1250
Misc. 600 900 150 20 3000
∑w =100 ∑Pw = 12610
 ∑Pw 12610
Consumer Price Index = = = 126.1
∑w 100

The denominator and numerator in both methods are the same as can be seen from the following:
∑P1Q0 of the Laspeyer’s method in the same as ∑PV of the family budget method.

PV = (P1Q0) × P0Q0 which is nothing but P1Q0.

Thus, there has been an increase of 26.1% in the consumer index in the current year.
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Illustration-14:
Contruct a consumer price index number from the table given below:
Group Index for 2003 Expenditure
Food 550 46%
Clothing 210 10%
Fuel and Lighting 220 7%
House rent 150 12%
Miscellaneous 275 25%

Solution:
Construction of consumer price index number
Group Index for 2003 Expenditure
IV
I V

Food 550 46 25300

Clothing 210 10 2150

Fuel and Lighting 220 7 1540

House rent 150 12 1800

Miscellaneous 275 25 6875

∑V = 100 ∑IV= 37665

∑IV 37665
Consumer Price Index = = = 376.65
∑V 100