Index numbers are statistical tools that measure changes in the magnitude of a group of related variables. They provide an overall indication of the trend in the diverging ratios from which they are derived. As defined by Croxton and Cowden, "Index numbers are methods of measuring differences in the magnitude of a set of related variables."
There are two methods of constructing simple index numbers.
(i) Simple Aggregative Method:
In this method, we use the following formula
Here, P01 = Price index of current year
ΣP1 = Sum of prices of the commodities in the current year
ΣP0 = Sum of prices of the commodities in the base year
(ii) Simple Average of Price Relatives Method
This method involves calculating price relatives for each commodity and then finding the simple average of all the price relatives.
Price relatives, P01 =
We can find out the price index number of the current year by using the following formula
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1. What is the purpose of constructing index numbers? |
2. What are the methods used for constructing index numbers? |
3. How are simple index numbers constructed? |
4. What is the difference between simple and weighted index numbers? |
5. What are some important index numbers used in economics? |
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