Price relative is simply the price of an item in one year, relative to another year i.e.
Where:
p
1
-is price of current year
P
0
- is price of base year

134
For example
:
Given the following information about a commodity Compute the price indices for each year
using fixed base method?
year
price
1991
8
1992
10
1993
12.5
1994
18
1995
22
1996
25
Solution:
P
0
8
1991_______
1992________
1993________
1994_________
1995__________
1996__________
Price relative shows the percentage change of the price of a commodity in the current period as
compared to the base period. Price relative is also considered as the price index of a commodity.
b)
Chain base method
Base is not fixed or it changes from year to year. Price of previous periods is taken as the base
period. This method shows whether rate of change is rising, falling or constant as well as the
extent of change from year to year
Where
p1
price of the current year
P2
price of the previous year

135
For example
:
Given the following information about a commodity Compute the price indices for each year
using chain base method?
year
price
1991
120
1992
125
1993
140
1994
150
1995
135
1996
160
Solution:
1991_______
1992________
1993________
1994_________
1995__________
1996__________
Merits of chain index method
1.
Provide a direct comparison between each year and preceding year and it is in such terms
that a business man often thinks
2.
Allows additional of new commodities, removal of old commodities and substitution of
one commodity to another.
3.
conditions.
Demerits of chain index method
1.
Computational procedure of chain indices is relatively cumbersome
2.
If an error is committed during the chain process, it will be carried through the entire
series
3.
The changes in two years separated by a long interval cannot be compared

136
II.
General index numbers method
When constructing of index numbers involves more than one commodity the index numbers are
called general index numbers. All the index numbers of all commodities are computed and then
they are averaged in each period
III.
Weighted index numbers
If all the commodities selected do not have equal importance for the consumers then weighting
system is adopted.
Appropriate weights are assigned to the different commodities sometimes qualities used are
taken as weights; due to weighting system index numbers becomes more valuable
When weights are also taken into consideration for the construction of index numbers then this is
known as weighted index numbers. There are two methods for construction of weighted index
numbers
A.
Weighted aggregate index method
B.

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