Class 11 Economics -Introduction to index numbers

INDEX NUMBERS

Economic activities have constant tendency to change. Prices of commodities which arc the total result of number of economic activities also have a tendency to fluctuate. The problem of change in prices is very important. But it is not very simple to study this problem and derive conclusions because price of different commodities change by different degrees. Hence, there is a great need for a device which can smoothen the irregularities in the prices to obtain a conclusion.
Our institute AMEND EDUCATION ACADEMY works in the direction to educate the students in the best possible way

1. Economics:
Introduction to index
numbers
PRESENTED BY-
Poonam Dua
Amend Education Academy
www.amendeducation.com

2. Topic Introducation
•An index number is an economic data figure
reflecting price or quantity compared with a
standard or base value. The base usually equals 100
and the index number is usually expressed as 100
times the ratio to the base value..
•A simple index number is the ratio of two values
representing the same variable, measured in two
different situations or in two different periods. For
example, a simple index number of price will
give the relative variation of the price between the
current period and a reference period.

3. Some More information about
INDEX NUMBER
•Economists frequently use index numbers when
making comparisons over time. An index starts
in a given year, the base year, at an index
number of 100. ... An index number of 102
means a 2% rise from the base year, and an
index number of 98 means a 2% fall.

4. Example

5. Index Numbers have the following features
•(i) Index numbers are specialised averages
which are capable of being expressed in
percentage.
•(ii) Index numbers measure the changes in the
level of a given phenomenon.
•(iii) Index numbers measure the effect of
changes over a period of time

6. •1. Index number helps in measuring relative
changes in a set of items.
•2. Index numbers provide a good basis of
comparison because they are expressed in
abstract unit distinct from the unit of element.
•3. Index numbers help in framing suitable
policies for business and economic activities"
Index Numbers are indispensable tools of
economic and business analysis. Their
significance can be appreciated by following
points :

7. PROBLEMS RELATED TO INDEX NUMBERS

9. WAYS OF CONSTRUCTING INDEX
NUMBERS

10. SIMPLE AGGREGATIVE METHOD
•Simple Aggregative
Under this method, the price index for a given
period is obtained by dividing the aggregate of
different prices of the current year by the aggregate
of different prices of the base year, and multiplying
the quotient by 100. As such, the price index, under
this method, is computed by the formula,
•P
01
= ( ∑P1/∑P0 ) X 100
•Where, P
01
= Price index of the current year with
reference to the base year
•∑P1 = total of the prices of the current year
•∑P0 = total of the prices of the base year.

18. Weighted average of price relative
The Weighted Average of Relatives Price Index. ... As the
term suggests, in 'a weighted average of relatives
computation, each relative is multiplied by its weight, the
products are added, and then the sum of the products is divided
by the sum of the weights. Weighted arithmetic mean of price
relative-
å
å
=
V
PV
P
01
100
0
1
´=
P
P
PWhere-
P=Price relative
V=Value weights=
00
qp

19. Weighted average of price relative

20. Value index numbers

21. A chain index is an index number in which the value of any given
period is related to the value of its immediately preceding period (resulting in an
index for the given period expressed against the preceding period = 100); this is
distinct from the fixed-base index, where the value of every period in a time
series is directly related to the same value of one fixed base period.
Calculate Chain Index Number for the following