QMT412 Business Statistics

Pn. Sanizah's Notes

5/31/2013

INTRODUCTION

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We often hear of index numbers such as: Kuala Lumpur Composite Index
EMAS Index Quality Air Index Air Pollution Index Consumer Price Index

CHAPTER 7
INDEX NUMBER

What is index number? Index number is a statistical tool used to measure changes in average price, quantity, value, air condition and economic health of a country for a stated period of time.

By Sanizah Ahmad

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TYPES OF INDEX NUMBERS

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ILLUSTRATION
API 0 - 50 51 - 100 101 - 200 201 - 300 301+ Air Pollution Level Good Moderate Unhealthy Very Unhealthy Hazardous

1. Price Index measures changes in prices of goods and services over time. (i.e. The Consumer Price Index measures the changes in the price of consumer goods)
Note: When CPI , living expenses and cost of living (normally, comparison is based on annual basis)

2. Quantity Index measures changes in the quantity of goods over time. 3. Quality Index

QMT412 Business Statistics

Pn. Sanizah's Notes

5/31/2013

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FACTORS IN CONSTRUCTING INDEX NUMBER

Number of items a group of items or only one item. Base year the year used to compare its value with the values of the other years
Index number for the base year is always 100. The base year should be a normal/stable year and not too far from the year that index is computed.

Simple Index Numbers Price index and Quantity Index

Unweighted Index 1. Simple Relative Index 2. Simple Average of Relative Index 3. Simple Aggregate Index Weighted Index

1. Weighted Aggregate Index

Weight value that shows the importance of an item in the index number
the higher the weights, the more important the item is.

2. Laspeyres index

3. Paasches index

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1. SIMPLE RELATIVE INDEX (SRI)

Ratio of the price of a single commodity in a given period to its price in the base period

UNWEIGHTED INDEX

Price relative

pt 100 p0

Quantity relative

qt 100 q0

QMT412 Business Statistics

Pn. Sanizah's Notes

5/31/2013

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EXAMPLE 1
Prices of petrol in 2004 and 2005 were RM1.30 and RM1.45 respectively. Taking 2004 as the base year, find the price relative index for 2005.

Solution Ex 1
po RM1 .30 pt RM1.45 Price relative, I p2005 1.45 100 100 111.54 p2004 1.30

The price of petrol in year 2005 has increased by 11.54% compared to the base year 2004.

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EXAMPLE 2
The table below gives the number of water filters sold by a company from 2008 to 2011.
Year Number of water filters 2008 400 2009 550 2010 800 2011 1600

Solution Ex 2
qo 400 qt 1600 Quantity relative, I qt 1600 100 100 400 qo 400

Calculate : Quantity relatives (quantity index) of sales for 2011 taking 2008 as the base year.

This means that in 2011, the number of water filter sold was 400 percent of the number sold in 2008, that is an increase of 300%.

QMT412 Business Statistics

Pn. Sanizah's Notes

5/31/2013

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Example 3
The table below shows the prices of three types of washing machines A, B and C in 2003 and 2005 and the price relatives in 2005, taking 2003 as the base year. Find the values of x, y and z.
2003=100 Price in 2003(RM) 800 1200 z Price in 2005 (RM) 1000 y 600 Price Relative x 140 120

2. Simple Average of Relative Index (SARI)

SARI compares the overall changes for a group of commodities or items under consideration Simple Average of relative price index

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A B C

pt 1 100 n p0
qt 1 100 n q0

Simple Average of relative quantity index

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Example 4

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The table below shows a countrys prices of petrol, diesel and cooking gas for 2004, 2006 and 2008. Compute the simple average of price relative index for year 2008 with 2004 as base year.

Example 5
Calculate the simple average of relative quantity index of three of foods A, B and C for 2005 taking 2003 as the base year.
Type of Food A B C Quantity sold (kg) 2003 600 1800 1200 2005 650 2200 1400

Item Petrol Diesel Cooking gas

2004 1.20 0.60 1.00

2006 1.35 0.70 1.20

2008 1.50 1.00 1.30

QMT412 Business Statistics

Pn. Sanizah's Notes

5/31/2013

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3. SIMPLE AGGREGATE INDEX (SAI)

This is an unweighted aggregate index. Simple aggregate price index
I

p p

100

WEIGHTED INDEX

Simple aggregate quantity index

I

q q

100

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1. WEIGHTED AGGREGATE INDEX

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EXAMPLE 6
For the data given below, calculate the weighted aggregate price index for 2006 using 2004 as the base year
Type of food
A B C

When the importance of each item needs to be included, we will have to calculate weighted index. A weighted price index

wp

wpt
0

Weight
3 5 8

100

Price 2004
1.50 2.80 5.00

Price 2006
2.00 3.20 6.00

A weighted quantity index

wq wq

100

Calculate weighted aggregate price index for 2006

QMT412 Business Statistics

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5/31/2013

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EXAMPLE 7
For the data given below, calculate the weighted aggregate quantity index for 2006 using 2003 as the base year.
Type of commodity A B C Weight 3 4 5 Quantity 2003 15 20 50 Quantity 2006 25 30 40

2. LASPEYRES INDEX
Laspeyres price index : Use the base year quantities as the weight
I

p q p q
q p q p
t 0

t 0

100

0 0

Laspeyres quantity index : Use the base year prices as the weight
I
0 0

100

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EXAMPLE 9

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3. PAASCHES INDEX
Pasches price index Use the current year quantities as the weight

Shelly Industry produce electrical components that require four main raw materials. The following tables shows the price and quantity required for each material.
Raw Material Price per kg (RM) Quantity (kg)

pq I p q
q0 pt qt pt

t t

100

2004 4.00 6.00 5.00 8.00

2006 5.00 7.00 4.00 9.00

2004 4000 2750 2000 1000

2006 3500 3000 3000 2000

0 t

A B C D

Pasches quantity index Use the current year prices as the weight

100

Using 2004 as the base year, calculate a)Laspeyres price index for year 2006 b)Paasches price index for 2006