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Overview of Index Numbers

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Maharashtra State Board: Class 12

Definition: Index Number

  • An Index Number is a statistical measure of changes in a variable or a group of variables with respect to time, geographical location, or some other characteristic, such as production, income, etc.
  • An Index Number is used for measuring changes in a quantity that can not be measured directly.

  • An Index Number is a single ratio, usually expressed as a percentage, that measures aggregate (or average) change in several variables between two different times, places, or situations.

Maharashtra State Board: Class 12

Key Points: Types of Index Numbers

  • Price Index Number – Measures change in prices (Inflation indicator)

  • Quantity Index Number – Measures change in output/quantity

  • Value Index Number – Measures change in total value (Price × Quantity)

Maharashtra State Board: Class 12

Definition: Base Period

The base period of an index number is the period against which comparisons are made.

Maharashtra State Board: Class 12

Key Points: Important Terminology

Symbol Meaning
p0 Price in base year
p1 Price in current year
q0 Quantity in base year
q1 Quantity in current year
w Weight
Price Relative
Base Year Year taken as 100
Current Year Year under comparison
Maharashtra State Board: Class 12

Formula: Simple Aggregate Method

Price Index:

\[P_{01}=\frac{\sum p_1}{\sum p_0}\times100\]

Quantity Index:

\[Q_{01}=\frac{\sum q_1}{\sum q_0}\times100\]

Value Index:

\[V_{01}=\frac{\sum p_1q_1}{\sum p_0q_0}\times100\]

Maharashtra State Board: Class 12

Formula: Weighted Aggregate Method

\[P_{01}=\frac{\sum p_1w}{\sum p_0w}\times100\]

Maharashtra State Board: Class 12

Formula: Price Index Numbers

Laspeyre’s Price Index Number:

\[P_{01}(L)=\frac{\sum p_1q_0}{\sum p_0q_0}\times100\]

Paasche’s Price Index Number:

\[P_{01}(P)=\frac{\sum p_1q_1}{\sum p_0q_1}\times100\]

Dorbish-Bowley’s Price Index Number:

\[P_{01}(D-B)=\frac{P_{01}(L)+P_{01}(P)}{2}\]

Fisher’s Ideal Price Index Number:

\[P_{01}(F)=\sqrt{P_{01}(L)\times P_{01}(P)}\]

Marshall-Edgeworth’s Price Index Number:

\[P_{01}(M-E)=\frac{\sum p_1(q_0+q_1)}{\sum p_0(q_0+q_1)}\times100\]

Walsh’s Price Index Number:

\[P_{01}(W)=\frac{\sum p_1\sqrt{q_0q_1}}{\sum p_0\sqrt{q_0q_1}}\times100\]

Maharashtra State Board: Class 12

Definition: Cost of Living Index Number

Cost of Living Index Number, also known as Consumer Price Index Number, is an index number of the cost of buying goods and services in day-to-day life for a specific consumer class.

Maharashtra State Board: Class 12

Formula: Aggregative Expenditure Method (Weighted Aggregate Method)

\[CLI=\frac{\sum p_1q_0}{\sum p_0q_0}\times100\]

Same as Laspeyre’s Price Index

Maharashtra State Board: Class 12

Formula: Family Budget Method

\[CLI=\frac{\sum IW}{\sum W}\]

Where, 

\[I=\frac{p_1}{p_0}\times100\]

W = p0q0

Maharashtra State Board: Class 12

Formula: Purchasing Power of Money

\[\text{Purchasing Power}=\frac{1}{CLI}\]

Maharashtra State Board: Class 12

Formula: Real Wages

\[\mathrm{Real~Wages}=\frac{\text{Money Wages}}{CLI}\times100\]

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