Distinguish between simple and weighted aggregative method of con… - Vidyadip

Question

Distinguish between simple and weighted aggregative method of constructing price index numbers.

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Answer

Simple Aggregative Method: Is the simplest method of constructing unweighted price index. In this method, total of the current year prices for the various commodities is divided by the total of the base year prices and the quotient is multiplied by 100. Symbolically,

$\text{P}_{01}=\frac{\Sigma\text{p}_1}{\Sigma\text{p}_0}\times100.$

Weighted Aggregative Method: Is a method of constructing weighted price index numbers. Weights are assigned to various items in the index according to their relative importance. Here weights are quantity weights. Laspeyre has used base year quantities as weights. According to Laspeyre,

$\text{P}_{01}=\frac{\Sigma\text{p}_1\text{q}_0}{\Sigma\text{p}_0\text{q}_0}\times100.$

Paasche has used current year quantities as weights. According to Paasche,

$\text{P}_{01}=\frac{\Sigma\text{p}_1\text{q}_1}{\Sigma\text{p}_0\text{q}_1}\times100.$

In simple aggregative method, all the items are treated as having equal importance whereas in weighted aggregative method, all the items are treated as having difference in importance.

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