Index Numbers- Weighted
To measure changes in prices of several commodities in a combined manner we use index numbers. There are two methods of constructing an index number.
Un-weighted Index Number and
Weighted Index Number
Weighted method is used when the entire commodity in the basket is not equally important, so weightage is given to them. The weighted index number has two types, namely, Weighted Average of Relative Methods (the price relatives for the current period taking the given year as base) and Weighted Aggregative methods (this method is used to calculate Price Index Number and Quantity Index Numbers). Some important formula under Weighted Aggregative method are Laspeyre’s method, Paasche’s method, Bowley’s Formula, Fisher’s Formula, Marshall-Edgeworth Formula, Value Index Number Formula, Kelly’s Formula, Walsch Formula, Base Year and Current Year Weighting Formulae. The tests of consistency for various index numbers are done through time reversal test, factor reversal test and circular test.
The different types of price index numbers include consumer price index (CPI) and wholesale price index (WPI). The different types of production index number include Index Number of Agricultural Production (IAP) and Index Number of Industrial Production (IIP) and SENSEX. Index numbers measures the fluctuation during different time intervals; it is helpful in forecasting the future economic trends, etc.
The limitations in construction of index number are:
Selection of Base Period
Purpose of finding index number
Selection of Items
The problems in constructing index numbers are faced because it is based on samples, it is difficult to take into account each and every item in the calculation of index numbers, index numbers are only approximate indicators of the relative level of phenomena, etc.
The importances of index numbers are as follows:
CPI are used to determine the purchasing power of money and for calculation of real wage:
WPI helps in indicating the affect of price change on national income, capital formation etc.
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The index number that does not have any reference consumer category isMarks:1
The wholesale price index number indicates the change in the general price level. From April, 2015, Consumer price index is new measure for measuring inflation in India.
Quantity weights are used inMarks:1
Quantity weighted aggregative method
Quantity weights are used in quantity weighted aggregative method. Value weights are used in weighted average of price relatives methods.
Name a few useful indices of present economy.Marks:3
Name of a few important indices to understand the health of any economy are sensex, human development index, producers price index (it will replace wholesale price index in near future), index of industry Production, agricultural production index. These indices provide us ready reckoners of the performances of stock market, economic development, and production system as a whole, change in production in the industrial sector and of agricultural sector respectively.
Which method is considered ideal for constructing index number?Marks:1
Fisher’s method of constructing index number is considered to be the ideal among all.
What is meant by weighted index number?Marks:1
Weighted index number is an index number in which different items are given relative importance in terms of different weights.