BIJU P M PGT ECONOMICS KV 2 KOCHI
BIJU P M PGT ECONOMICS KV 2. KOCHI
We can measure the change in the prices of vegetable oil and tea in two ways: (a) Actual Difference (b) Relative change (Price Relative) A. Actual difference = Current year price (-) Base year price Rs. 80 (-) Rs. 40 = Rs. 40 Rs. 150 (-) Rs. 100 = Rs. 50
B. Price Relative =80 – 40 / 40=1(actual difference / base year price For Tea = 150 -100 / 100 =0. 5 This change can be expressed in percentage : for Vegetable oil : 1 X 100 = 100% For tea : 0. 5 X 100 = 50% Price Relative symbolically P 1 ___ X 100 P 1 = Price of the current year (2010) P 0 = Price of the base year (2000) 80 X 100 = 200 __ 40 150 ___ X 100 = 150 100
Index Numbers – Meaning and Definition Index numbers are used to measure changes in group of items that are related to each other. The changes measured are time to time or place to place or From one commodity to another. They are usually expressed In percentages. According to Blair : Index numbers are a specialized type of averages. ”
Characteristics of Index Numbers Expressed in numbers : Expressed in percentages Relative Measure : Universal Utility Comparative Measurement :
Uses OR importance OR Advantages of Index Numbers 1. It simplifies complexities : Ex. Sales, Volume of imports or exports 2. It facilitates comparative study : 3. Use in business sphere : 4. Helpful in fixation of salary and allowances : 5. To measure the changes in the value of money :
Problems in the construction of Index Numbers 1. The purpose of Index Numbers : If monetary wages of worker then we should construct Retail price Index, If we want to get knowledge regarding changes in money value, then Wholesale price Index should be constructed. 2. Selection of Commodities : The exact number and types of commodities to be selected for the construction of an index number depends on the purpose for which the index number is to be used. The selection commodities should be represented of the group for which the index number is to be constructed. E. g. - If we want to construct CPI we should include the retail prices of those good which are important in the family budget and in the construction of WPI (whole sale price index) we should include whole sale prices sum then measures industrial and agricultural commodities and other good services. 3. Selection of Base Year : Comparison is made between time periods and different places so, a base year is identified which should not be too long or too short, free from abnormalities or irregular fluctuation. Such as riots, war, flood, earthquake etc. Base year should be shifted from time to time.
4. Selection of representative Prices : Both kind of prices should be used depends on the purpose of which the index number is to be constructed. E. g. - If we want to measure changes in general price level. 5. Selection of weighting methods : weighting may be according to value or quantity. 6. Selection of Appropriate Averages : such as Arithmetic mean , median, mode, geometric mean, which Can be used in the construction of Index Numbers. But in practice , only Arithmetic mean and geometric mean are recommended.
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