Index Numbers
UNIVERSAL VIRTUAL CONTENT ACADEMY (UVC)
CPA PAPER 5
Index numbers
By the end of topic, participants should be able to; 1. Appreciate the usefulness of index numbers in monitoring changes over time 1. Calculate simple indices 2. Determine simple aggregate price indices 3. Use laspeyre’s and Paashe’s price indices to determine weighted indices.
What is an index number?
An index number is a statistical measure designed to show/ monitor changes over a period of time in the price, quantity or value of an item or a group of items. It compares the value of a variable at any time with its value at another fixed time called the base period.
There are different types of index numbers eg. Price index numbers, cost of living index numbers, sales index numbers etc.
The base year
A base year can be defined as the year against which all other years are compared. The base year selected should be a stable/ normal year where you do not have prices changing rapidly. It should not be too distant from the current year. The price or quantity of base year is represented by 100 and those of other years measured against it.
An index relative
An index relative sometimes just called a relative is the name given to an index number which measures the change in a single distinct commodity
Simple indices
Index for a period = value in a period Value in base period Price index (price relative) = Price at given year x 100 Price at base year
Index relative
Price index (price relative) = Pn/Po x 100
Quantity relative Quantity relative = (qn/qo) x 100
Example
In 1990 the price of a certain commodity was shs 40 whilst in 1995 its price was shs 60. Taking 1990 as the base year, find the price relative.
Solution
Price relative = Price at 1995 x 100 Price at 1990 = 60
CPA PAPER 5
Index numbers
By the end of topic, participants should be able to; 1. Appreciate the usefulness of index numbers in monitoring changes over time 1. Calculate simple indices 2. Determine simple aggregate price indices 3. Use laspeyre’s and Paashe’s price indices to determine weighted indices.
What is an index number?
An index number is a statistical measure designed to show/ monitor changes over a period of time in the price, quantity or value of an item or a group of items. It compares the value of a variable at any time with its value at another fixed time called the base period.
There are different types of index numbers eg. Price index numbers, cost of living index numbers, sales index numbers etc.
The base year
A base year can be defined as the year against which all other years are compared. The base year selected should be a stable/ normal year where you do not have prices changing rapidly. It should not be too distant from the current year. The price or quantity of base year is represented by 100 and those of other years measured against it.
An index relative
An index relative sometimes just called a relative is the name given to an index number which measures the change in a single distinct commodity
Simple indices
Index for a period = value in a period Value in base period Price index (price relative) = Price at given year x 100 Price at base year
Index relative
Price index (price relative) = Pn/Po x 100
Quantity relative Quantity relative = (qn/qo) x 100
Example
In 1990 the price of a certain commodity was shs 40 whilst in 1995 its price was shs 60. Taking 1990 as the base year, find the price relative.
Solution
Price relative = Price at 1995 x 100 Price at 1990 = 60