Introduction to Index Number Test - 3

Statistics does not give any specific importance to the individual items; in fact it deals with an aggregate of objects

Index numbers possess much practical importance in measuring changes in the cost of living, production trends, trade, policy formation, income variations, etc.

The base year refers to the year to which comparison is made with. We will compare 2010 with 2008 with respect to prices

The index number of industrial production measures changes in the level of industrial production comprising many industries.

In case of calculating the price index, assuming that for individual item  price at the base period.

p0 indicate the price of the commodity in the base period, Symbolically p0 prices of base year

The base year for any index number is routinely updated. That year in which there are Minimum cyclical fluctuations.

A composite index number is a number that measures an average relative changes in a group of relative variables with respect to base whereas a simple index number is a number that measures a realive change in a single variable with respect to base.So, composite index number is based on an aggregate of items.

Since, all items in data do not have equal importance to consumers, we give different weightages to different items to reflect their relative importance in the group. If i buy 1 kg of wheat per week and 7 kg of rice per week. It implies that to me, weightage lies in rice more than wheat.

The Laspeyres price index is an index formula used in price statistics for measuring the price development of the basket of goods and services consumed in the base period.

An Index number is a technique of averaging all the changes in the group of series over a period of time. Index numbers is a special type of average which provides a measurement of relative changes from time to time or from place to place.

Paasche’s Method:

Under this method of calculating Price Index, the quantities of the current year are used as weights as compared to base year quantities used by Laspeyres.

Consumer price index (CPI).Since, data here belongs to consumers, we compute CPI.

IIP is calculated by the Central Statistical Organisation (CSO). CSO takes the base year as 2004-05.

According to this ,a year posessing the features laid down in statistics is taken as a base year and Comparison is made between base year and current year.

Index numbers are today one of the most widely used statistical devices. They, are used to feel the pulse of the economy and they have come to be used as indicators of inflationary or deflationary tendencies.

Index number is measured for quantitative data not qualitative data.

Price index =P1/P0*100. Here , current price level  is computed as a percentage of base year price level . So , the ratio P1/P2 is expressed as a percentage  by multiplying it by 100 .

The term weight refers to the relative importance of the different items in the construction of index numbers.

Quantity index numbers measure the changes in the physical volume of production.

In  statistics ,we assume that index no. of base year is hundred. If the index number calculated from data is less than 100, it implies deflation and if it is greater than 100, it implies inflation.

Index numbers measure changes in variables with respect to time. Quantity of anything is a variable. So, when current year quantity is compared with base year quantity, we have quantity index number.

(i)     Laspeyre suggested that for the purposes of calculating Price Indices, the quantities in the base year should be taken as weights.

(ii)    Paasche’s method of calculating Price Index, the quantities of the current year are used as weights. 

(iii)    The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy such as mining, electricity and manufacturing.

The base year for any index number is routinely updated. That year in which there are Minimum cyclical fluctuations

In this method, the family budgets of a large number of people are carefully studied and the aggregate expenditure of the average family on various items is estimated.