Index Numbers- Unweighted

Introduction

Index numbers refer to a statistical tool for measuring changes in the magnitude of a group of related variables over different periods of time. The characteristics of index numbers are it is expressed in terms of percentage to show the extent of relative change, it is a relative or comparative measurement of a group of items, it helps in comparing the changes in a series of different units, etc.

The two methods of constructing index numbers are:

    Un-weighted and

    Weighted

Unweighted method is used when the entire commodity in the basket is equally important, so no weightage is given. The two methods of constructing the unweighted index numbers are simple aggregative index numbers and simple average of price relatives. However, the simple average of price relatives does not give any consideration to the importance of commodities. The merits of un-weighted index number are: it is not influenced by the units in which the prices are quoted, it is not influenced by the extreme values as equal importance is given to all items, etc.

The demerits of un-weighted index number are: this method faces the problem in the selection of an appropriate average, relative conclusions are assumed to have equal importance, but this assumption may not always be correct, etc.

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