Page 240 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics Dilfraz Singh, Lovely Professional University

Notes Unit 18: Methods—Simple Average of Price Relatives

CONTENTS
Objectives
Introduction
18.1 Simple Average of Price Relatives
18.2 Merits and Limitations of Simple Average of Price Relatives Method
18.3 Summary
18.4 Key-Words
18.5 Review Questions
18.6 Further Readings

Objectives

After reading this unit students will be able to:
• Explain Simple Average of Price Relatives.
• Know the Merits and Limitations of Simple Average of Price Relatives Method.
Introduction

When this method is used to construct a price index first of all price relatives are obtained for the
various items included in the index and then an average of these relatives is obtained using anyone
of the measures of central value.
18.1 Simple Average of Price Relatives Method

In this method, we can use either Arithmetic Mean or Geometric Mean as the average of relatives.
(a) Using Arithmetic Mean: The arithmetic average has the advantage of simplicity but it is too
much affected by the extreme values. It gives too much weight to increasing prices and little to
decreasing ones. According to this method, we first find out price relative for each commodity
and then take simple average of all price relatives. A price relative is the percentage ratio of the
price of a variable in the current year to the price in the base year. Thus,

⎛ P ⎞
∑ 1 × ⎜ 100 ⎟
P = ⎝ P 0 N ⎠
01

∑ P
⇒ P = N
01

P 1
[where, P 0 × 100 = Price Relative = P; N = Number of Commodities; P = Current Year’s Price;
1
P 0 = Base Year’s Price.]
Example 1: Given the following data and using the Price Relative method, construct an Index for
the year 1993 in relation to 1983 price.

234 LOVELY PROFESSIONAL UNIVERSITY