Hence there are many problems involved in the

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Unformatted text preview: ey provide guidelines to policy. 10. To measure the purchasing power of money. 10.3 Types of Index numbers: There are various types of index numbers, but in brief, we shall take three kinds and they are (a) Price Index, (b) Quantity Index and (c) Value Index (a) Price Index: For measuring the value of money, in general, price index is used. It is an index number which compares the prices for a group of commodities at a certain time as at a place with prices of a base period. There are two price index numbers such as whole sale price index numbers and retail price index numbers. The wholesale price index reveals the changes into general price level of a country, but the retail price index reveals the changes in the retail price of commodities such as consumption of goods, bank deposits, etc. (b) Quantity Index: Quantity index number is the changes in the volume of goods produced or consumed. They are useful and helpful to study the output in an economy. (c) Value Index Value index numbers compare the total value of a certain period with total value in the base period. Here total value is equal to the price of commodity multiplied by the quantity consumed. Notation: For any index number, two time periods are needed for comparison. These are called the Base period and the Current period. The period of the year which is used as a basis for comparison is called the base year and the other is the current year. The various notations used are as given below: P1 = Price of current year P0 = Price of base year q1 = Quantity of current year q0 = Quantity of base year 242 10.4 Problems in the construction of index numbers No index number is an all purpose index number. Hence, there are many problems involved in the construction of index numbers, which are to be tackled by an economist or statistician. They are 1. Purpose of the index numbers 2. Selection of base period 3. Selection of items 4. Selection of source of data 5. Collection of data 6. Selection of average 7. System of weighting 10.5 Method of construction of index numbers: Index numbers may be constructed by various methods as shown below: INDEX NUMBERS Un weighted Weighted Simple Simple Weighted Weighted aggregate average average aggregate Index of price of price index numbers relative relative number 10.5.1 Simple Aggregate Index Number This is the simplest method of construction of index numbers. The price of the different commodities of the current year are added and the sum is divided...
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