{"id":582,"date":"2021-04-02T12:15:01","date_gmt":"2021-04-02T12:15:01","guid":{"rendered":"https:\/\/bcisnotes.com\/fourthsemester\/?p=582"},"modified":"2021-04-04T07:15:00","modified_gmt":"2021-04-04T07:15:00","slug":"method-of-index-number","status":"publish","type":"post","link":"https:\/\/bcisnotes.com\/fourthsemester\/method-of-index-number\/","title":{"rendered":"Method of Construction of Index Number || Data Analysis and Modeling || Bcis Notes"},"content":{"rendered":"<h2 style=\"text-align: center;\"><strong>Method of Construction of Index Number<\/strong><\/h2>\n<p><strong>1 Introduction:<\/strong><br \/>\nIndex number measures the relative change in the value of the variable with respect to time. For example, they are used to measure the change in the price of the commodity, income status of the people, the employment rate of the people, price hike, etc with respect to some base period. It is always expressed in percentage form for comparison, the index number for the base period is always equal to 100%.<\/p>\n<p><strong>1 Method of Construction of Index Number:<\/strong><br \/>\nThere are mainly two methods used in the construction of index numbers.<br \/>\ni) Unweighted Index Number:<br \/>\nii) Weighted Index Number:<\/p>\n<p><strong>i) Unweighted Index Number:<\/strong> In this method, all the items are considered equally important i.e. it assumed that the weight of all items is the same. Under this method, we use the following two methods to obtain the index number.<\/p>\n<p><strong>a. Unweighted Aggregate \/Simple Index Number:<\/strong><br \/>\n<strong>b. Unweighted Average of Relative Method:<\/strong><\/p>\n<p><strong>a) Unweighted Aggregate \/ Simple Index Number :<\/strong><br \/>\n\u2022 Unweighted aggregate price index number for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-585 size-full\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/index-1.jpg\" alt=\"Unweighted Aggregate \/ Simple Index Number\" width=\"300\" height=\"91\" \/><\/p>\n<p>\u2022 Unweighted aggregate quantity index number for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-586 size-full\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/index-2.jpg\" alt=\"Unweighted Aggregate \/ Simple Index Number\" width=\"267\" height=\"92\" \/><\/p>\n<p>\u2022 Unweighted aggregate value index number for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-588 size-full\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Unweighted-aggregate-value-index-number.jpg\" alt=\"Unweighted aggregate value index number\" width=\"206\" height=\"47\" \/><br \/>\nThe notations have their usual meaning.<\/p>\n<p><strong>b) Unweighted average of relative method:<\/strong><br \/>\n\u2022 Unweighted averages of the relative price index for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-589 size-full\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-3.jpg\" alt=\"Unweighted average of relative method\" width=\"291\" height=\"133\" \/><br \/>\nWhere \u2018n\u2019 is the number of products or number of elements.<\/p>\n<p>\u2022 Unweighted averages of relative quantity index for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-590\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/index4.jpg\" alt=\"Unweighted average of relative method\" width=\"287\" height=\"207\" \/><br \/>\nThe notations have their usual meaning.<\/p>\n<p><strong>ii) Weighted Index Number:<\/strong> In this method, appropriate weights are assigned to the commodities according to their importance. Under this method, we use two methods to obtain the index number.<\/p>\n<p>a. Weighted aggregate methods:<br \/>\nb. Weighted average of relative methods:<\/p>\n<p><strong>a. Weighted aggregate methods:<\/strong><br \/>\nUnder this method, we use Laspeyres and Paasche index number.<br \/>\n<strong>i) Laspeyres index number:<\/strong><br \/>\n<strong>a. Laspeyres price index number:<\/strong> Laspeyres index number takes the base period quantity (Q0) as a weighting factor; it is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-591\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyres-Index-Number-300x57.jpg\" alt=\"Laspeyres Index Number\" width=\"300\" height=\"57\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyres-Index-Number-300x57.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyres-Index-Number.jpg 587w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p><strong>b. Laspeyres quantity index number:<\/strong> Laspeyres quantity index number takes the base period price (P0) as a weighting factor; it is obtained by using the following relation<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-592\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyers-Quality-Number-300x62.jpg\" alt=\"Laspeyers Quality Number\" width=\"300\" height=\"62\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyers-Quality-Number-300x62.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Laspeyers-Quality-Number.jpg 584w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p><strong>ii) Paasche index number:<br \/>\na. \u00a0The Paasche price index number<\/strong> takes the current period quantity (Qi) as a weighting factor and it is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-593\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Passche-price-Index-Number-300x56.jpg\" alt=\"Passche price Index Number\" width=\"300\" height=\"56\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Passche-price-Index-Number-300x56.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Passche-price-Index-Number.jpg 517w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p><strong>b. Paasche quantity index number:<\/strong> Paasche quantity index number takes the current period price (Pi) as a weighting factor and it is obtained by using the following relation<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-594\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Paasche-quantity-index-number-300x38.jpg\" alt=\"Paasche quantity index number\" width=\"339\" height=\"43\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Paasche-quantity-index-number-300x38.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Paasche-quantity-index-number.jpg 701w\" sizes=\"(max-width: 339px) 100vw, 339px\" \/><\/p>\n<p><strong>Note:<\/strong><br \/>\n<strong>\u2022 Fisher index number:<\/strong> Fisher index number is the geometric mean of the Laspeyres and Paasche index number. Mathematically,<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-595\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Fisher-Index-Number-300x20.jpg\" alt=\"Fisher index number\" width=\"405\" height=\"27\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Fisher-Index-Number-300x20.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Fisher-Index-Number.jpg 641w\" sizes=\"(max-width: 405px) 100vw, 405px\" \/><\/p>\n<p>Where<br \/>\nL.P.I.N= Laspeyres Price Index Number<br \/>\nP.P.I.N= Paasche Price Index Number.<\/p>\n<p><strong>Note:<\/strong><br \/>\n<strong>\u2022 Fixed weight aggregative method:<\/strong> In this method, weight is assigned from any period instead of base and current period.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-596\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-1-300x127.jpg\" alt=\"Fixed weight aggregative method\" width=\"480\" height=\"203\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-1-300x127.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-1-768x326.jpg 768w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-1.jpg 884w\" sizes=\"(max-width: 480px) 100vw, 480px\" \/><\/p>\n<p><strong>b. Weighted Average of Relative Method:<br \/>\n<\/strong><strong>\u2022 Weighted average of relative price index number:<\/strong> The weighted average of the relative price index for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-597 size-medium\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-2-300x140.jpg\" alt=\"Weighted average of relative price index number\" width=\"300\" height=\"140\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-2-300x140.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-2.jpg 398w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p><strong>Note:<\/strong><br \/>\nIf the base period is used for the weight (value weight) then replace PnQn by P0Q0 in the above relation.<\/p>\n<p>If the current period is used for the weight (value weight) then replace PnQn by PiQi in the above relation.<\/p>\n<p><strong>\u2022 Weighted average of relative quantity index number:<\/strong> The weighted average of relative quantity index for the current period \u2018i\u2019 compared to base period \u20180\u2019 is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-598 size-medium\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-3-300x119.jpg\" alt=\"Weighted average of relative quantity index number\" width=\"300\" height=\"119\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-3-300x119.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Index-Number-3.jpg 415w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p>Where PnQn = Fixed Value Weight.<\/p>\n<p><strong>Note:<\/strong><br \/>\nIf the base period is used for the weight (value weight) then replace PnQn by P0Q0 in the above relation.<br \/>\nIf the current period is used for the weight (value weight) then replace PnQn by PiQi in the above relation.<\/p>\n<p><strong>2\u00a0 Cost of Living \/Consumer Price Index Number:<\/strong><br \/>\nCost of Living \/Consumer Price Index Number measures the average change in the cost of maintaining a living standard of the people in the current period compared to the base period (reference period) i.e. It measures the change in average retail price paid by a specific class of people to maintain their previous living standard in the current period. Two methods are used to obtain the cost of living index number.<\/p>\n<p><strong>\u2022 Aggregate expenditure method:<\/strong> in this method, the cost of living index number is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-599\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number-300x49.jpg\" alt=\"Cost of living Index Number\" width=\"300\" height=\"49\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number-300x49.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number.jpg 546w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><br \/>\nThis is also known as the Laspeyres price index number.<\/p>\n<p><strong>\u2022 Family budget method:<\/strong> in this method, the cost of living index number is obtained by using the following relation.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-600 size-medium\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number.JPG0_-300x66.jpg\" alt=\"Family budget method\" width=\"300\" height=\"66\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number.JPG0_-300x66.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number.JPG0_.jpg 662w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\n<p>This formula can be written in the following form.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-601\" src=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number1-300x186.jpg\" alt=\"Cost of living Index Number\" width=\"442\" height=\"274\" srcset=\"https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number1-300x186.jpg 300w, https:\/\/bcisnotes.com\/fourthsemester\/wp-content\/uploads\/2021\/04\/Cost-of-living-Index-Number1.jpg 692w\" sizes=\"(max-width: 442px) 100vw, 442px\" \/><\/p>\n<p><strong>3 Uses of index numbers:<\/strong><br \/>\nThey are very useful in studying the change in the trend or tendency of a series over a period of time. With the help of index numbers, it is easy to find out the trend of exports, imports, the balance of payment, industrial production, price, national income, and a variety of other phenomena. As a measure of average changes, they are very useful in foresting future trends. With the help of index numbers of price, demand, wages, income, etc. a business executive is in a better position to take decision about whether a new product should be launched or whether there is scope for exploring new markets or whether the existing pricing and production policies need a change. Also, it helps in measuring the purchasing power of money and index number are very helpful in deflating national income on the basis of a constant process to enable us to find out whether there is any change in the real income of the people.<\/p>\n<p>&nbsp;<\/p>\n<p><em>You may also like:\u00a0<a href=\"https:\/\/bcisnotes.com\/fourthsemester\/index-number\/\">Index Number<\/a><\/em><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<div class=\"mh-excerpt\"><p>Method of Construction of Index Number 1 Introduction: Index number measures the relative change in the value of the variable with respect to time. 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