1By ILTAF MEHDI, IT Lecturer, MIHE, Kabul CHAPTER_NO : 04 INDEX NUMBERS

Index Numbers Def: ”Index numbers are statistical measures designed to show changes in a variable or group of related variables with respect to time, geographic location or other characteristics such as income, profession, etc.” A collection of index numbers for different years, locations, etc., is sometimes called an index series. 2By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

Kinds of Index Numbers Simple Index Number: A simple index number is a number that measures a relative change in a single variable with respect to a base. Composite Index Number: A composite index number is a number that measures an average relative changes in a group of relative variables with respect to a base. 3By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

Types of Index Numbers: Following types of index numbers are usually used: Price index Numbers: Price index numbers measure the relative changes in prices of a commodities between two periods. Prices can be either retail or wholesale. Quantity Index Numbers: These index numbers are considered to measure changes in the physical quantity of goods produced, consumed or sold of an item or a group of items. 4By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

Construction of Price Index Numbers The following steps are considered for the construction of price index numbers: 1.Object 2.Selection of Commodities 3.Collection of Price Data 4.Selection of Base Period 5By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

1.) Object The first and the most important step in the construction of index numbers is to decide the object for making the index numbers of prices. The prices may be retail or whole-sale. 1)The index numbers of retail prices are called the consumer price index (CPI) numbers and 2)if the whole-sale prices are taken into consideration, the index numbers are called the whole-sale price index numbers. 6By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

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2.) Selection of Commodities The second in the construction of index numbers is the Selection of Commodities. A list of important commodities is prepared. Those commodities are taken into account which is commonly consumed by the consumers. There is no hard and fast rule about the number of commodities (20 commodities is a small number and 50 commodities is a reasonable number). Sometimes the index numbers of very important commodities like wheat, rice, oil, ghee etc. are calculated. The second in the construction of index numbers is the Selection of Commodities. A list of important commodities is prepared. Those commodities are taken into account which is commonly consumed by the consumers. There is no hard and fast rule about the number of commodities (20 commodities is a small number and 50 commodities is a reasonable number). Sometimes the index numbers of very important commodities like wheat, rice, oil, ghee etc. are calculated. 8By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

3.) Collection of Price Data The most important and difficult step is the collection of prices. The prices are to be taken from the field. For retail price index numbers, retail prices are needed. The prices change from place to place and from time to time. The prices are taken on daily basis and then weekly and monthly averages are calculated. Finally quarterly or yearly averages are calculated. 9By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

4.) Selection of Base Period The prices of the commodities in the current period are to be compared with the prices of some period in the past. This period in the past is called the base period or the reference period. This period should not be in the remote past. The period which is economically stable and is free of disturbances and strikes is taken as the base period. 10By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

Methods for finding Index Numbers Different methods are used for to find the index numbers. Following four methods are used mostly… 1)Fixed Base Method 2)Chain Base Method 3)Un-weighted Index Numbers 4)Weighted Index Numbers 11By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

1.) Fixed Base Method In fixed base method, a particular year is generally chosen randomly and the prices of the subsequent years are expressed as relatives of the prices of the base year. Sometimes instead of choosing a single year as the base, a period of a few years is chosen and the average price of this period is taken as the base year’s price. The fixed base method is used by the Government in the calculation of national index numbers. 12By ILTAF MEHDI, IT Lecturer, MIHE, Kabul

In Fixed Base 13By ILTAF MEHDI, IT Lecturer, MIHE, Kabul Price relative for current year or

Fixed Base Example: Find index numbers for the following data taking 1980 as base year. By ILTAF MEHDI, IT Lecturer, MIHE, Kabul14 Years Price

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2.) Chain Base Method In this method, there is no fixed base period. The year immediately preceding the one for which price index have to be calculated is assumed as the base year. Thus, for the year1994 the base year would be 1993, for 1993 it would be 1992 for 1992 it would be 1991 and so on. By ILTAF MEHDI, IT Lecturer, MIHE, Kabul16

2.) Chain Base Method By ILTAF MEHDI, IT Lecturer, MIHE, Kabul17

2.) Chain Base Method By ILTAF MEHDI, IT Lecturer, MIHE, Kabul18

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