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.
- Fall '16