QUANTITAIVE METHODS - II

A Project on Index Number, Time value money, and

Introduction of matrix.

Prepared by FYBBI student in the year of 2008-09

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Date:

GROUP MEMBERS

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SAGAR BHUVAD 10

VISHNU ALWAL 03
AKNNOWLEDGEMENT
We express our sincere thanks to our esteemed
institution “GURU NANAK KHALSA COLLEGE” for this opportunity
given to us.

We wish to express our deep sense of gratitude to

Professor Allan D’souza. We also sincerely thank to all our
professors and non-teaching staff. They have been constant
source of inspiration in completing the project. It is our foremost
duty to thanks all our respondents and group member who
helped us in completing our project.
 BIBLIOGRAPHY

• Book Name : Quantitative Method – II

(Published by Vipul Publication)
 INDEX

 INDEX NUMBER

• Concept Of Index Number

• Methods of constructing price index numbers
1) Simple Average of Relatives method.
2) Weighted Average of Relatives Method
3) Simple Aggregate Method
4) Weighted Aggregate method
• Chain Base Index Numbers

 TIME VALUE OF MONEY

• Introduction
• Basic Concepts
• The Value Of Money Relationship
• Interest Rates, Simple And Compound Interest
• Future Value Of A Single Amount
• Doubling Period
• Future Value Of An Annuity
• Present Value

 INTRODUCTION TO MATRICES

• Notion of a Matrix
• Types Of Matrices
• MATRIX ARITHMATIC
1) Conformable matrices
2) Addition of Matrices

• Some Arithmatic Properties Of Matrices

 THE CONCEPT OF INDEX NUMBERS

Index numbers are one of the most widely used statistical indicators to gauge
the state of the economy and are aptly termed as ‘economic barometers’ or
barometers of economic activity’. Browsing through important indices (of a country)
e.g. index numbers of wholesale prices, agricultural production, industrial
production, share prices etc. gives a fairly good idea of the economy of a country.
Index numbers are statistical devices designed to measure the relative
changes in a phenomenon (a variable or a group of variable) with respect
to time, geographical location or other characteristics such as income,
profession, etc.
An index numbers compares a current value of a variable or a group of
variables to a base value of the same variables(s), by so that the index for the base
value as a percentage of the base value, so that the index for the base value is
100. This is done across commodities and an average figure is arrived at. For
examples, the cost of living index number looks at commodities used to satisfy the
needs such as food, clothing, shelter etc., while the shares. Similarly, other
phenomena that are studied are sales, industrial production, agricultural
production, imports, exports, the national income of a country, etc.,
METHODS OF CONSTRUCTING PRICE INDEX NUMBERS

There are two broad approaches to calculate price index numbers

1. Average of relative method
2. Aggregate Method.

1. Simple Average of Relatives Method:

E.g. A commodity A was priced at Rs. 22/- per unit in the base year (1982) and Rs. 33/- per unit
in the current year (1990) [the phrase “current year” or “given year” is usually used as the year
for which the index is being calculated.] Then the “price relative” for the commodity A is the
ratio of price to the base year price expressed as percentage. That is 33 x 100=1.5x100=150.
22
This means that assuming the base year price to be 100, the price of commodity A has
increased by 50% compared to the base year price and has become 150% of the base year price.

Similarly, suppose that the prices of commodity B for the base year and the current year
are Rs.50 and Rs.65 respectively and another commodity C are Rs.40 and Rs.44 respectively.
Then the corresponding price relatives for the two commodities are:

For Commodity B: 65 x 100 =1.3 x 100 = 130.

50
For Commodity B: 44 x 100 =1.1 x 100 = 110.
. 40
Thus compared to the base year (assumed) price 100, the three commodities have price
relatives 150, 130, and 110 respectively. Their average is 150+130+110 = 390 = 130.
3
P01 = Σi where i = p1 x 100 Or Σ p 1 x 100
n po P01 = p0 ...
N

Illustration 1.1

Commodities A, B, C were priced at Rs.22, Rs.50 and Rs.40 per unit respectively in the
year 1982 and Rs.33, Rs.65 and Rs.44 per unit in the year 1990. Find the index number for
prices for 1990, taking 1982 as the base year, using simple average price relatives’ method.

Solution:

Price Per Unit (Rs.) Price Relatives

Commodity in 1982 ( p0) in 1982 ( p1) I = p1/p0 x 100
A 22 33 150
B 50 65 130
C 40 44 110
TOTAL - - 390=Σi
2. Weighted Average of relatives Method:

In the above illustration, we assumed that all the three commodities were of equal importance.
But in practice, different commodities have different level of importance based on their
consumption or production etc. Thus they can be assigned different weights, denoted by w. The
weighted average of relatives method calculates the individual price relative for the different
commodities using the formula i =P1 x 100 exactly as before, but while taking an average, it takes
Po
the weighted average of the price relatives and hence we have

P01 = Σiw where I = p1 x 100

Σw p0
And w = weights of the commodities

(This is similar to the formula x = Σx for calculating mean for data without frequency, being
n
Changed to x = Σx calculating mean for data with frequency.)
Aft
We use the same commodities as in illustration 1.1, but assume that their share in the total
consumption is 30% for A, 50% for B and 20% for c respectively, to demonstrate the weighted
average of relative’s method.

Illustration 1.2:

Commodities A, B, C were priced at Rs. 22, Rs.50 and Rs.40 per unit respectively in the
year 1982 and Rs.33, Rs 65 and Rs 44 per unit in the year 1990. The relative weights for the
three commodities are 30, 50 and 20 respectively. Find the index number for prices for 1990,
taking 1982 as the base year using weighted average of price relative’s method

Solution:

Weights
Price Per Unit (Rs.) w Price Relatives iw

in 1982 (po) in 1990 (Po) I = p1 x 100

Commodity (p0) (p1) p0
A 22 33 30 150 4,500
B 50 65 50 130 6,500
C 40 44 20 11 2,200
TOTAL - - 100 = Σw 13,200 = Σiw

P01 = Σiw = 13,200 = 132

Σw 100

This index number, 132 is slightly higher than the one in illustration 1.1, which is 130. this is
because the commodity a, whose price per unit increased most, (by 50%) has more weight (30)
than commodity C, whose price per unit increased least (by 10%) which has weight 20.
3. Simple Aggregate Method:

This method is much simpler than the above two methods. In this method, the prices for the base
year and the current year for all the commodities are totaled, Σpo and Σp1 are calculated. Then
the aggregate of the current year prices (Σp1) is expressed as a percentage of the aggregate of the
base year prices (Σpo). Thus the index number using simple aggregate method is:

Po1= Σp1 x100

Σ

Where Po =Base year prices

And P1 =Current year prices

We use of same data as in illustration1.1 to demonstrate this method.

Illustration 1.3

Commodities A,B,C were priced at Rs.22, Rs.50 and Rs.40 per unit respectively in the
year 1982 and Rs.33, Rs.65 and Rs.44 per unit in the year 1990. Find the index number for prices
in 1990,taking 1982 as the base year, using simple aggregate method.

Solution:

Price Per Unit (Rs.)

in 1982 in 1990
Commodity (p0) (p1)
A 22 33
B 50 65
C 40 44
TOTAL 112 = Σp0 142 = Σp1
4. Weighted Aggregate Method:

In this method the prices of different commodities are multiplied by their weights before
aggregation or totaling hence we have ΣP1w and ΣPow respectively, and their ratio expressed as
a percentage, is the index number.
Σp1w x 100
Po1 = Σ

Where Po = Prices for the base year,

P1 = Prices for the current year,

W = Weights

The following illustration constructs the weights aggregate index number for the data in
illustration 1.2.

Illustration 1.4:

Commodities A, B, C were priced at Rs.22, Rs.50 and rs.40 per unit respectively in the year
1982 and Rs.33, Rs.65 and Rs.44 per unit in the year 1990. The relative weights for the three
commodities are 30, 50 and 20 respectively. Find the index number for prices for 1990, taking
1982 as the base year, using weighted aggregate method.

Solution:
Price Per Unit (Rs.) Weights
Comodity in 1982 (p 0) in 1982 (p1) w p0w p1w
A 22 33 30 660 990
B 50 65 50 2500 3250
C 40 44 20 800 880
TOTAL - - 3,960 = Σp 0w 5,1250 = Σp 1w
4) CHAIN BASE INDEX NUMBERS

Usually, a base year is fixed and the index numbers are calculated for the successive years
keeping this base year fixed, only changing the current year (i.e. given year). This method is
called the fixed base method.

In practice, often a comparison of prices with a fixed base year that is two decades ago or so,
becomes meaningless. Hence in chain base method, for each year, a comparison is make with
the immediately preceding year. The index number for a year relative to the previous year as the
base year is called a link relative. These link relatives are then chained together to give chain
index numbers for the years, which are like fixed base index numbers taking the original year as
the base year.

Thus we have

Link Relative = __Price in a given year__ x 100

Price in the previous year

Average link relative Chain index for

(Chain index for a given year) = for the given year _ x _____previous year__
100

Illustration 1.8:

From the following data regarding prices of 3 commodities from 1990 to 1995, calculate the
chain base index number.

Price of Commodity
Year A B C
1990 20 50 80
1991 22 60 85
1992 25 62 88
1993 29 65 93
1994 31 70 95
1995 32 78 99
 TIME VALUE OF MONEY
INTODUCTION

In our economic life, money is not free. Money has time value. Interest rates give money its
time value. If the investor has some spare cash or funds, he can invest it in savings deposit in
saving deposit in a bank and receive more money later. If the investor wants to borrow money,
he must repay a larger amount in the future due to interest. The result is that Rs.100 in hand
today, is worth more than Rs.100 today can be invested to provide Rs.100 plus interest after a
year. The interest rates in the economy provide money with its time value. There are two types
of decisions which require some consideration of time value. The first future cash benefits. The
other decision involves borrowing now to make current expenditure at a cost of having less
money in the future. The intelligent investor requires familiarity with the concepts of compound
interest.

Basic Concepts

(a) PRESENT VALUE: A present value is the discounted value of one or more future cash

(b) FUTURE VALUE: A future value is the compounded value of a present value.

(c) DISCOUNT FACTOR: The discount factor is the present value of a rupee received in the
future.

(d) COMPOUNDING FACTOR: The compounding factor is the future value of a rupee.

Discount and compounding factors are functions of two things; (i) the interest rate used and
(ii) the time between the present values. The discount factor decrease as time increase. The
discount factor also decreases as interest rate increases.

TIME VALUE OF MONEY RELATIONSHIP:

The basic time value of money relationships are presented in the following equations:

(1) PV= FVx DF

(2) FV= PVx CF

Where, PV = present value

FV= Future value

. 1 .
DF= Discounting factor = (1+R) t

CF= Compounding factor = (1+R) t

R= Rate of interest

T= Time in years.
INTEREST RATES, SAMPLE AND COMPOUND INTEREST

The debentures or bonds carry a fixed rate of interest. It is also known as “coupon” rate. Interest
is payable at this rate on the face value of the debenture or bond. However, if the
debentureholder has not paid the full face value of the debenture, the interest will be paid only on
the paid up value. The future value of an amount invested or borrowed at a given rate of interest
can be calculated if the maturity period is given.

Simple Interest:

Simple interest is calculated on the principal amount invested or borrowed at a given rate of
interest and maturity period. For example, A deposit of Rs. 5,000 carrying 10% interest per
annum for 3 years period the simple interest will be as follows:

P x R x M = Principle x Rate of Interest x Maturity.

= 5,000 x _10_ x 3
100
= Rs. 1,500

Therefore Future Value = Rs. 5,000 + Interest of Rs. 1,500

= Rs. 6,500.

Compound Interest:

Compound interest is calculated on the principal plus interest at the end of the each year. Thus,
the compound interest is the interest on the amount of interest also. For example, A deposit of
Rs. 5,000 carrying 10% interest p.a for 3 years period, the compound interest will be calculate as
follows:

PV x CF = Future Value
Where PV = Preset value
CF = Compounding Factor
Therefore
Future Value = Rs. 5,000 x (1.10)3
Rs. 5,000 x 1.331
Rs. 6,655.

Thus, the compound interest = FV – principal

= 6,655 – 5,000
= Rs. 1,655.
In the same example, the simple interest is Rs. 1,500 and the compound interest is Rs. 1,655.
Thus, the compound interest is normally higher than the simple interest. The compound interest
can be calculated yearly half-yearly or quarterly.

(A) FUTURE VALUE OF A SINGLE AMOUNT

The future value of an amount invested or borrowed at a given rate of interest can be calculated
if the maturity period is given. Supposes, a deposit of Rs.5,000 gets 10 percent interest
compounded annually for a period of 3 years, the future value will be:
.
PV X CF =5,000 x (1.10)3 = 5,000 x1.331 = Rs.6,655

Illustration:

Mukesh has invested Rs. 10,000 in Bank Certificate of Deposit for 2 years, at 8 percent
interest. How much will he receive at maturity?

Solution:

FV = PV X CF

FV = 10,000 x (1.08)2

FV = 10,000 x 1.1664

FV = Rs. 11,664.

Mukesh will receive Rs. 11,664 at maturity of 2 years.

(B) DOUBLING PERIOD:

Some, investor should know how long it will take to double his money at a given rate of
interest. In this case, a rule of thumb called the rule of 72, can be used. This rule works pretty
well for most of the interest rates. The rule of 72 says that it will take seventy-two years to
double your money at 1 per cent interest. You can calculated the doubling period by dividing 72
by the interest rate. You can also estimate the interest rate required to double your money in the
given number of years by dividing number of years into 72.

For example, if the interest rate is 12 per cent, it will take 6 years to double your money
(72/6).

A more accurate method used for doubling your money is using the rule of 69. According
to this rule, the doubling period of an investment is = 0.35 + . 69 .
Interest rate. Thus the doubling
period of investment of different rates of interest can be
69
(1) Interest rate 12% = o.35+ 12 = o.35+5.75 = 6.1 years.
69
 (2) Interest rate 15% = 0.35 + 15 = 0.35+4.60 =4.95 years.

Illustration:

If the interest rate is 10%, what are the doubling periods of an investment at this rate?

Solution:
72
(a) As per rule of 72, the doubling period will be 10 = 7.2 years.
69
(b) As per the rule of 69, the doubling period will be 3.35+ 10 = 0.35+6.9 =7.25years.

(C) FUTURE VALUE OF AN ANNUITY:

An annuity is a series of payments of a fixed amount for a specified number of periods.

When payments are made at the end of each year, it is called ordinary annuity. On the other
hand when the payments are made at the beginning of the year, it is called an annuity due.
Normally, it is assumed that the first annuity payment occurs at the end of the first year.

The future value of an annuity is determined on the basis of the following formula:
(1+R)t-1
FVA = A { R }
Where A = Periodic cash payments

R = annual interest rate

T = time in years/ duration of annuity.

(1+R)t-1
The value of R can be determined by using the

The value of money tables. The future Value Interest Factors (FVIFA ) for various years are as
shown in table:

YEAR FVIF @8% FVIF @10% FVIF @12% FVIF @14%

1 1.0000 1.0000 1.0000 1.0000
2 2.0800 2.1000 2.1200 2.1400
3 3.2464 3.3100 3.3744 3.4396
4 4.5061 4.6410 4.7793 4.9211
5 5.8666 6.1051 6.3528 6.6101
6 7.3559 7.3359 8.1152 8.5355
7 8.9228 9.4872 10.089 10.730
8 10.636 11.435 12.299 13.232
9 12.487 13.579 14.775 16.085
10 14.486 15.937 17.548 19.337
Illustration:

Four equal annual payments of Rs.5,000 are made into a deposit account that pays 8 percent
interest per year. What is the future value of this annuity at the end of 4 years?

Solution:

The future value of annuity = Rs.5,000 x FVIFA @ 8%

= Rs.5,000 X 4.5061
= Rs.22530.50.

PREENT VALUE

Many times, investors like to know the present value which grows to a given future value.
Suppose, you want to save some money from your salary to buy a scooter after 5 years. You
should know how much money should be put into bank now in order to get the future value after
5 year. The present value is simply the inverse of compounding used in determining future
value. The general relationship between future value and present future is given in the following
formula:
. 1 .
PV=FV x DF = FV x (1+r)t

Illustration:

Find the present value of Rs.10, 000 receivable 6years hence if the rate of interest is 10 percent.

Solution:
. 1 z
PV = FV x = (1+R )t
. 1 .
= 10,000 x (1.10)6
PVIF 10% for 6 years = 0.5645
= 10,000 x 0.5645
= Rs. 5,645.

Illustration:
Find the present value of Rs. 50,000 to be received at the end of four years at 12 Percent interest
compounded quarterly.

Solution:
PV = FVt [ (1+R)t] 4X4
PV = FV x PVIR at 12%
= RS. 50,000 x 0.623
= RS. 31.150.
 INTRODUCTION TO MATRICES
NOTION OF A MATRIX

Sir Arthur cayley, a famous mathematician, invented and used the notation of matrices in
the year 1858 while writing down a set of linear equations in a compact form. A matrix can be
thought of as an abstract and compact form of writing a table without any column and row titles
of a usual table.

For example, consider the following table, showing the quantity sold in 3 stores A,B,C of a
company of their two products P and Q in the month of April 2005.

Quantity Sold of
Store Product P Product Q
A 10 13
B 12 14
C 20 18

Now, if we remove all the information except the main six figures (arranged in 3 rows and 2
columns) and enclose them in rectangular brackets, the arrangement will look like this:

10 13
12 14
20 18

Such an arrangement is called a 3x2 matrix or a matrix of order 3x2.

TYPES OF MATRICES

Some type of special interest and are give special names. We list below some of them.

(1) Zero Matrix:

A matrix having all its elements as zero is called a Zero matrix or a null matrix.
Some examples:

0 0 0 0
0 0 (000) 0 0
0 0
 A zero matrix of order m x n is usually denoted by Om x n

(2) Row Matrix:

A matrix containing only one row is called a row matrix. In other works, a matrix of
order 1 x n is called a row matrix. It is also called as a row vector. Some examples:

[3], [1,-1], [3,-2, 0 ].

(3) Column Matrix:

A matrix containing only one column, i.e., a matrix of order m x 1, is called a
column matrix or a column vector. Some examples:

[-10], 3 6
-5 0
-6

(4) Square Matrix:

A matrix whose number of rows are equal to the number of columns, i.e., a matrix
of order m x m, is called as a square matrix. Some examples:

1 3 123
A = [6], P= -2 0 , Q= 321
312

The elements a11, a22, a33, ….. etc., in a square matrix are called diagonal elements.
For examples, 6 is the diagonal element of A above. The diagonal elements of P above are, 1,0
and of Q are 1, 2,2.

Identity of Unit Matrix:

A square matrix whose diagonal elements are .1 and non-diagonal elements are 0 is
called an identity or unit matrix. Examples of identity matrix of order 1,2,3 and 4 are:

1 0 1 0 0 1 0 0 0
[1], 0 1 , 0 1 0, 0 1 0 0
0 0 1 0 0 1 0
0 0 0 1
MATRIX ARITHMATIC

CONFORMABLE MATIRCES

When two matrices have the same numbers of rows as well as the same number of columns,
they are called conformable.

We will be defining the operations of addition and subtraction of conformable matrices.

ADDITION OF MATRICES
Consider the following tables, showing the quantities sold in 3 stores A,B,C of a company of
their two products P and Q in the month of April and May 2005.

Sale in April Sale in may April and may Combined sale

P Q P Q P Q
A 10 13 A 15 16 A 25 29
B 12 14 B 12 16 B 24 30
C 20 18 C 18 20 C 38 38

The contents of can be easily expressed in a matrix form as follows.

10 13 15 16 10 + 15 13 + 16
12 14 + 12 16 = 12 + 12 14 + 16
20 18 18 20 20 +18 18 +20

Illustration:

11 -1 3 7 8 -6
If A = 6 0 4 , B = 2 -1 1 then find A + B.

Solution:

11 + 7 -1 + 8 3 + (-6) 18 7 -3
A+B= 6 + 2 0 + (-1) 4 + 1 = 8 -1 5
SOME ARITHMATIC PROPERTIES OF MATRICES

Matrix addition and multiplication by a number (often called a scalar ) follow some properties
similar to the properties of number arithmetic. Suppose A,B,C k, l are numbers. Then we have
the following:

(1) Commutativity of addition A + B = B +A

(2) Association of Addition A + (B + C ) = (A + B ) +C

(3) Addition of Zero Matrix A + O = A where O is the zero matrix of the same order.

(4) Additive inverse A + (-A) = O (as noted above).

(5) Distributivity Properties:

(i) K x ( A + B ) = ( K x A ) + ( K x B)

(II) (K + l ) x A = ( K x A ) + ( l x A)

Illustration:

If A = 3 -1 find 5A and 1
4 0 , 5 A

Solution:

3 -1 5 x 3 5 x (-1) 15 -5
5A = 5 4 0 = 5x4 5x0 = 20 0

1 1 3 1
1 = 1 3 -1 = 5x3 5 x (-1) = 5 - 5
5 A 5 4 0
1 1 4
5x4 5x0 5 0