Page 224 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes B 40 60
C 80 90
D 110 120
E 20 20
Total Σ P 0 = 300 Σ P 1 = 360

ΣP 1
P = × 100
01 ΣP 0

ΣP = 360, ΣP = 300
0
1
360
P = × 100 = 120
01 300
This means that as compared to 2004, in 2005 there is a net increase in the prices of
commodities included in the index to the extent of 20%.
Merits and Demerits of Simple Aggregate method: Simple aggregative method of index number
construction is very easy but it can be applied only when the prices of all commodities have been
expressed in the same unit. If units are different, the results will be misleading:
Limitations of Simple Aggregate method: There are two main limitations of the simple aggregative
index.
(i) In this type of index, the items with the large unit. Prices exert the greatest influence.
(ii) No consideration is given to the relative importance of the commodities.
16.2 Weighted Aggregative Index Numbers

These indices are of the simple aggregative type with the fundamental difference that weights are
assigned to the various items included in the index. There are various methods of assigning weights
and consequently a large number of formulae for constructing index numbers have been devised of
which some of the more important ones are:
1. Laspayres method.
2. Paasche method.
3. Dorbish and Bowley method.
4. Fisher’s ideal method, and
5. Marshall-Edgeworth method.
All these methods carry the name of persons who have suggested them.
1. Laspeyres Method: It is the most important of all types of index numbers. In this method the
base year quantities are taken as weights. The formula for constructing the index is:
Σpq
10
P = ×100
01 Σpq
00
Steps:
(i) Multiply the current year prices of various commodities with base year weights and obtain
Σpq .
10
(ii) Multiply the base year prices of various commodities with base year weights and obtain
Σpq .
00
(iii) Divide Σpq by Σpq and multiply the quotient by 100. This gives us the price index.
10
00

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