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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers6 Marks
Question
Discuss the general method of constructing an index number.
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Answer

The general method of constructing an index number is the calculation by simple index number.
In simple index number, all items are given equal weightage.There are two unweighted methods for it.
  1. Simple Aggregative Index.
  2. Simple Average of Price Relatives.
  1. Simple Aggregative Method: In this method, the average price of all items in the current year is expressed as a percentage of the same in the base year. Index Number is determined by using the formula:
$\text{P}_{01}=\frac{\Sigma\text{p}_1}{\Sigma\text{p}_0}\times100.$
Here, ‘O'stands for the base year and 'l' stands for the current year.
$Ep_1$ = Sum of prices of different commodities for the current year.
$Ep_0$ = Sum of prices of different commodities for the base year.
  1. Simple Average of Price Relative Method: In this method, price relatives are calculated as below:
$\text{P}_{01}=\frac{\Sigma\Big(\frac{\text{p}_1}{\text{p}_0}\times100\Big)}{\text{N}}$
Here, N = Number of commodities
$P_1$ = Price of current year
$P_0$ = Price of base year Average of price relatives is obtained by the formula:
$\frac{\text{p}_1}{\text{p}_0}\times100$ = Price relative.

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