Types of Simple Price Index

Types of Simple Price Index

1.    Simple Aggregative Price Index

Simple aggregative price index may be calculated by the following formula

Price Index = ∑Pn / ∑Po x 100

Pn= current aggregative Price

Po= Base aggregative price

2.    Simple Price Relative Index

Simple price relative index may be calculated by the following formula

Simple price index = 1/k x ∑[pn/po]

Types of weighted Price Index

Weighted price index is calculated by assigning weight (importance) to prices , famous weighted price index includes lasper price index & Paasche Price Index

1.    Lasper Price Index

Lasper price index is calculated by the following formula

Price index = [∑Pnqo/∑Poqo] x 100

Prices are weighted by the base quantity of the commodities.

2.    Paasche Price Index

Paasche price index is calculated with following formula

Price index = [∑Pn x qn/∑Po x qn] x 100

Prices are weighted with the current quantity i.e. both current prices & base prices are weighted with the base quantity.

Limitations of Index Number

Limitations of Index Number

Index number construction involves number of limitation or problem which includes purpose specification, data collection, and base selection.

1.    Index number Purposes

Index number purpose definition is first step in index number construction. The purpose of index number calculation or construction must be clear. The index number calculated for one purpose cannot interpret used for other purpose.

2.    Data Collection

Index number calculation requires a lot of data and therefore a lot of resources are required to collect data. It is not only the data collection, but more importantly the accuracy of data, and therefore a great care is required during the lot collection of data.

3.    Index Number base Selection

Index number base selection is also a difficult task, there are number of consideration for index number base selection. There are advantages and disadvantages of each base selection method, therefore a careful analyses is required for selection of right base.

4. Index Number only Estimates

Index number results are only estimates and cannot explain or represent the actual situation. Thus index number should not be over relied for decision making.

5. Manipulation is Possible

Index number can easily be manipulated . for example a desired result can be produced by selecting a base year. 

Index Number Concept

Index Number Concept

Index number tells about the average change in a variable over the period of time or with respect of time.

Index Number Base

Index number (change) is calculated with respect of a base period. Base has fundamental importance in index number calculation and with the help of base comparison is possible.

Index Number Types

Index number can be classified into two types i.e. simple index number & composite index number. Single index number deals with single variable (calculated for single variable), while composite index number may be calculated for number of variables.

Index Number Construction Steps

Index number construction process involves four steps i.e. selection of commodities and their prices, selection of bases, section of average, and selection of weights.

1.    Selection of commodities

Index number construction first step is selection of commodities which are to be included for calculating index number for whole sale price. There is no hard and fast rule for such selection, however, there is a general principal for such selection i.e. larger is number greater would be the accuracy.

2.    Selection of Base

Index number construction second step is to select a base for index number. There are two methods of selection a base i.e. fixed based & Chain based method. In fixed base method a year is chosen as base which does not change over the life of index number, while in chain base method base changes i.e. immediately preceding year is regarded as base.

3.    Selection of average

Index number construction third step is to choose an appropriate average which includes arithmetic mean, geometric mean and median.

4.    Selection of weights

Index number construction last step is to choose an appropriate weight. Weights are used to identify relative importance of a commodity. There are two types of weights i.e. base year weighting & current year weighting.