CHAPTER 18 5 MARKS

INDEX NUMBERS

BY: SHIVANI SHARMA

 INDEX NUMBERS

● Index numbers are convenient devices for measuring relative changes of

differences from time to time or from place to place

● An index number is a ratio of two or more time periods , one of which is the

base time period. The value at the base time period serves as the standard

point of comparison.

● Index number for the base period is always taken as 100

● Example: NSE, BSE, WPI, CPI etc.

 IMPORTANT ISSUES IN INDEX CREATION

SELECTION OF DATA BASE PERIOD USE OF AVERAGE

● understand the purpose ● Point of reference in ● The geometric mean is

for which the index is comparing various data. better in averaging
● The period should be relatives, but for most of
used
normal the indices arithmetic
● often constructed from the
● It should be relatively mean is used because of
sample. Ensure that it is
recent its simplicity.
representative.
 TYPES OF Index Numbers

Quantity Index Value Index

Price Index Numbers
Numbers Numbers
 ● Relatives are derived because absolute numbers measured in some appropriate

unit, are often of little importance and meaningless in themselves.

RELATIVES

PRICE RELATIVES QUANTITY RELATIVES VALUE RELATIVES

For individual commodity

Que. Price relative is-

(a) P1/P0 × 100

(b) P

(c) P0

(d) P1/P0

a
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Que. The index number of prices at a place in 2008 is 355 with 2003 as base. This
means -
(a) There has been on the average a 255% increase in prices.
(b) There has been on the average a 355% increase in price.
(c) There has been on the average a 250% increase in price.
(d) None of these.

Ans. a

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Que. The whole sale price index number or agricultural commodities in a

given region at a given date is 280. The percentage increase in prices of
agricultural commodities over the base year is:
(a) 380
(b) 280
(c) 180
(d) 80

Ans. c

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Que. If the prices of all commodities in a place have
increased 1.25 times in comparison to the base period,
the index number of prices of that place now is

(a) 125

(b) 150

(c) 225

(d) None of these.

c
Que. If the prices of all commodities in a place have
decreased 35% over the base period prices,then the
index number of prices of that place is now

(a) 35

(b) 135

(c) 65

(d) None of these.

c
 LINK RELATIVES

When successive prices or quantities are taken, the relatives are called
the link relative,

CHAIN RELATIVES

When the above relatives are in respect to a fixed base period these are also called the
chain relatives with respect to this base or the relatives chained to the fixed base
 METHODS

SIMPLE
WEIGHTED

AGGREGATIVE RELATIVE
AGGREGATIVE RELATIVE

MARSHALL
LASPEYRES’ PASSCHES’ EDGEWORTH
INDEX FISHERS’ INDEX
INDEX INDEX
 SIMPLE AGGREGATIVE METHOD

● In this method of computing a price index, we express the total of commodity

prices in a given year as a percentage of total commodity price in the base
year. In symbols, we have

● where Pn is the sum of all commodity prices in the current year and Po is the sum

of all commodity prices in the base year.

SIMPLE AGGREGATIVE METHOD
 SIMPLE AGGREGATIVE METHOD

MERITS: Easy to understand

DEMERITS:

● Commodity with higher price will have greater influence in index value.

● If units are changed then the Index numbers will also change.

● Price quotations become the concealed weights which have no logical

significance.
Que. From the following data

The simple Aggregative Index is

(a) 115.8

(b) 110.8

(c) 112.5 b
(d) 113.4
 SIMPLE AVERAGE OF RELATIVES

● Under this method we invert the actual price for each variable into
percentage of the base period. These percentages are called
relatives . The index number is the average of all such relatives.

∑
∑

N
SIMPLE AVERAGE OF RELATIVES
 SIMPLE AVERAGE OF RELATIVES

● One big advantage of price relatives is that they are pure numbers.
MERITS:
● Price index number computed from relatives will remain the same
regardless of the units by which the prices are quoted

DEMERITS:

● In Spite of some improvement, the above method has a flaw that

it gives equal importance to each of the relatives

● This defect can be remedied by the introduction of an appropriate

weighing system.
Que. From the following table by the method of relatives using Arithmetic
mean the price Index number is

(a) 140.35

(b) 148.25

(c) 140.75

(d) None of these.

b
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Ans. b

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 WEIGHTED AGGREGATIVE INDEX

Under this method we weigh the price of each commodity by a suitable

factor often taken as the quantity or value weight sold during the base
year or the given year or an average of some years.
 WEIGHTED AGGREGATIVE INDEX

a. Laspeyres’ Index: In this Index base year quantities are used

as weights:

b Paasche’s Index: In this Index current year quantities are used as weights:
 WEIGHTED AGGREGATIVE INDEX

C The Marshall-Edgeworth index uses this method by taking the average of the
base year and the current year

d. Fisher’s ideal Price Index: This index is the geometric mean of

Laspeyres’ and Paasche’s.
 WEIGHTED AGGREGATIVE INDEX

BOWLEY INDEX:

Laspeyres’ Index + Paasche’s Index

2
 WEIGHTED AVERAGE OF RELATIVE METHOD

● To overcome the disadvantage of a simple average of relative method,

we can use weighted average of relative method.
● Generally weighted arithmetic mean is used although the weighted
geometric mean can also be used.
● The weighted arithmetic mean of price relatives using base year value
weights is represented by

Same as Laspeyres’
Index
Que. From the following data

The Passche price Index number is :

(a) 146.41

(b) 148.25
a
(c) 144.25

(d) None of these.

Que. From the following data base year :-

Fisher’s Ideal Index is

(a) 117.3

(b) 115.43

(c) 118.35
a
(d) 116.48
Que. The Bowley’s Price index number is represented in terms
of :

(a) A.M. of Laspeyre’s and Paasche’s Price index number.

(b) G.M. of Laspeyre’s and Paasche’s Price index number.

(c) A.M. of Laspeyre’s and Walsh’s price index number.

(d) None of these.

a
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Que. If the prices of all commodities in the base year are twice the values of the
respective commodities in the current year, then the Fisher's ideal index number is
equal to:
(a) 200
(b) 50
(c) 400
(d) 25

Ans. b

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Que. In the data group Bowley’s and Laspeyre’s index number is as follows. Bowley’s
index number = 150, Laspeyre’s index number = 180 then Paasche’s index number is:
(a) 120
(b) 30
(c) 165
(d) None of these

Ans. a

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Que. Fisher’s method for construction of Index Numbers uses_______

(a) Geometric Mean
(b) Harmonic Mean.
(c) Median
(d) HM

Ans. a

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Que. Fisher’s ideal index number is:

(a) The Median of Laspeyre’s and Paasche’s index numbers
(b) The Arithmetic Mean of Laspeyre’s and Paasche’s index numbers
(c) The Geometric Mean of Laspeyre’s and Paasche’s index numbers
(d) None of these

Ans. c

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Que. The Paasches and Fishers index numbers are 169 and 156
respectively, then Laspyre’s Index number is:
(a) 144
(b) 152
(c) 148
(d) 151.5

Ans. a

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Que. Which one of the following index uses the method of average of base year and
current year?
(A) Paasche's Index
(B) Laspeyre's Index
(C) Marshall-Edgeworth Index
(D) Fisher's Index

Ans. c

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Que. If the prices of all goods change in the same ratio, then
(A) Laspeyre's index and Paasche's index numbers are equal.
(B) Laspeyre's index and Paasche's index numbers are not equal.
(C) Laspeyre's index is greater than Paasche's number.
(D) Laspeyre's index is less than Paasche's index number.

Ans. a

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Que. Given that ∑pnqn = 300, ∑p0q0 = 125 and Paasche’s index number is 200 then
the value of ∑p0qn is
(A) 125
(B) 150
(C) 250
(D) 100

Ans. b

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CHAIN INDEX NUMBERS
CHAIN INDEX NUMBERS

Ans. b
 QUANTITY INDEX NUMBERS

●
 QUANTITY INDEX NUMBERS

●
 VALUE INDEX NUMBERS

● Value equals price multiplied by quantity. Thus a value index equals the total
sum of the values of a given year divided by the sum of the values of the base
year, i.e.,
 DEFLATING TIME SERIES USING INDEX NUMBERS

Real Wages = Actual wages x 100

Cost of living Index

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Que. The consumer price index in 1990 increases by 80- per cent as compared to the base
1980. A person in 1980 getting ₹ 60,000 per annum should now get
(a) ₹ 1,08,000 per annum
(b) ₹ 82,000 per annum
(c) ₹ 64,000 per annum
(d) None of these

Ans. a

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Que. Monthly salary of an employee was ₹ 10,000 in the year 2010 and it was increased to ₹
20,000 in the year 2023 while the consumer price index number is 240 in year 2023 with the
base year 2010, what should be his salary in comparison of consumer price index in the
year 2023 ?
(a) 2,000
(b) 16,000
(c) 24,000
(d) None of these

Ans. c

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Que. In the year 2010 the monthly salary was ₹ 24,000. The consumer price index number
was 140 in the year 2010 which rises to 224 in the year 2016. If he has to be rightly
compensated what additional monthly salary to be paid to him
(a) ₹ 14,400
(b) ₹ 38,400
(c) ₹ 7,200
(d) None of these

Ans. a

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Que. During the certain period the cost of living index goes up from
110 to 200 and the salary of a worker is also raised from 330 to 500,
then in the real terms , the raise in salary is effectively

(a) Gain by 75

(b) gain by 50

(c) loss by 90

(d) loss by 50

d
SHIFTING PRICE INDEX
 SPLICING TWO INDEX SERIES

● two index covering different bases may be combined into single series
by splicing.
 UNIT TEST

TEST OF TIME REVERSAL TEST

ADEQUACY
FACTOR REVERSAL TEST

CIRCULAR TEST
 TEST OF ADEQUACY

UNIT TEST

i. This test requires that the formula should be independent of

the unit in which or for which prices and quantities are
quoted.
ii. Except for the simple (unweighted) aggregative index all
other formulae satisfy this test.
 TEST OF ADEQUACY

TIME REVERSAL TEST

● It is a test to determine whether a given method will work both ways in time,
forward and backward.
● The test provides that the formula for calculating the index number should be
such that two ratios, the current on the base and the base on the current
should multiply into unity.
● In other words, the two indices should be reciprocals of each other.
Symbolically,
 TEST OF ADEQUACY

TIME REVERSAL TEST

● where P01 is the index for time 1 on 0 and P10 is the index for time 0 on 1.

● Laspeyres’ method and Paasche’s method do not satisfy this test, but Fisher’s

Ideal Formula does.

 TEST OF ADEQUACY

FACTOR REVERSAL TEST

● This holds when the product of price index and the quantity index should be
equal to the corresponding value index,

● Fisher’s Index satisfies Factor Reversal test

 NOTE

● While selecting an appropriate index formula, the Time Reversal Test

and the Factor Reversal test are considered necessary in testing the

consistency.

● Because Fisher’s Index number satisfies both the tests in , it is called

an Ideal Index Number.

 TEST OF ADEQUACY

CIRCULAR TEST

● As per this test , P01 X P12 X P20 = 1

● It is concerned with the measurement of price changes over a period of years,

when it is desirable to shift the base.
● This property therefore enables us to adjust the index values from period to period
without referring each time to the original base.
● The test of this shiftability of base is called the circular test.

● This test is not met by Laspeyres, or Paasche’s or the Fisher’s ideal index.
● The simple geometric mean of price relatives and the weighted aggregative with fixed weights meet this
test.
Que. Which of the following index measures the change from month to month in
the cost of a representative "basket" of goods and services of the type which are
brought by a typical household?

(a) Retail Price Index

(b) Laspeyre's Index

(c) Fisher's Index

(d) Paasche's Index

Ans. a
Que. _________P01Q01= which of following test satisfies the
above?

(a) Time Reversal Test

(b) Factor Reversal Test

(c) Circular Test

(d) None of these.

b
Que. Time reversal & factor reversal are:

(a) Quantity Index

(b) Ideal Index

(c) Price Index

(d) Test of Consistency

d
Que. Consumer price index is commonly known as

(a) Chain Based index

(b) Ideal index

(c) Wholesale price index

(d) Cost of living index

d
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Que. Circular test is satisfied by which index number?

(a) Laspeyre’s
(b) Paasche’s
(c) Fisher’s
(d) Simple Geometric mean of price Relatives and the aggregative with Fixed weights.

Ans. d

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Que. Which of the following statement is true ?

(a) Paasche’s index number is based on base year quantity
(b) Fisher’s index satisfies the circular test
(c) Arithmetic mean is the most appropriate average for constructing the index number
(d) Splicing means constructing one continuous series from two different indices on the
basis of common base.

Ans :d

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Que. Purchasing power of money is _____

(a) Reciprocal of price index number
(b) Equal to price index number
(c) Unequal to price index number
(d) None of these

Ans. a

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Que. The number of test of Adequacy in Index numbers:

(a) 2
(b) 3
(c) 4
(d) 5

Ans. c

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Que. Circular Test is satisfied by:

(a) Paasche’s Index Number
(b) The simple geometric mean of price relatives and the weighted aggregative with fixed
weights
(c) Laspeyre’s Index Number
(d) None of these

Ans. b

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Que. The ______ is satisfied when Pab × Pbc × Pca = 1

(a) Time reversal test
(b) Factor reversal test
(c) Circular Test
(d) none of these

Ans. c

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Que. ______ is an extension of time reversal test.

(a) Factor reversal test
(b) Circular test
(c) Unit test
(d) None of these

Ans. b

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Que. Fisher’s index number satisfies the _______ tests

(a) Time Reversal Test
(b) Factor Reversal Test
(c) both
(d) none

Ans. c

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Que. The Cost-of-Living Index (CLI) is always

(a) Weighted Index
(b) Price Index
(c) Quantity Index
(d) None of these

Ans.a

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