Page 238 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes
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.
Self-Assessment

1. Tick (√√ √√ √) the correct statements
(i) Simple index number is that number in which all the items are assigned equal.
(ii) In Lasreyers method, the base year quantities are taken as weights.
(iii) In pass the method the current year quantities are taken as weights.
(iv) In Marshall-Edgeworth Method both the current year as well as base year prices ae considered.
17.2 Summary

• 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.
• Simple Index Number is that Index number is which all the items are assigned equal importance.
In other words, weights are not assigned to the different commodities and as such it is also
called unweighted Index Number.
There are two methods of calculating Simple Index Number.
(i) Simple aggregate method.
(ii) Simple average of price relative method.
• This is the simplest method of constructing Index Number. In this method the total of current
year prices for the various commodities is divided by the total of base year prices, the resultant
so obtained is multiplied by 100 to get the Index Numbers for the current year in terms of
percentage.
17.3 Key-Words

1. Index Number : Index Number is that Index number is which all the items are
assigned equal importance. In other words, weights are not
assigned to the different commodities and as such it is also called
unweighted Index Number.
2. Price index : Index that tracks inflation by measuring price changes. Examples
include the Consumer Price Index and the Producer Price Index.
3. Consumer price index (CPI) : A measure of changes in the purchasing-power of a currency and
the rate of inflation. The consumer price index expresses the
current prices of a basket of goods and services in terms of the

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