Simple Aggregative Method
19/07/2020We use this method of construction for computation of index price. As a result, the total cost of any commodity in any given year to the total cost of any commodity in the base year is in percentage form.
Simple Aggregative Price Index – (∑ Pn/ ∑ P0) * 100
Where
∑Pn = Sum of the price of all the respective commodity in the current time period.
∑Po = Sum of the price of all the respective commodity in the base period.
The simple aggregative index is very simple to understand. However, there is a serious defect in this method. The first commodity, here, has more influence than the rest two. This is so because the first commodity has a high price than the rest.
Furthermore, if we anyhow change the units, the index number will also go through a change. This is one of the biggest flaws of this methods. Use of absolute quantities turn the tables around. Therefore, considering independent values for the three years would be a better option.
To construct a simple price index, compute the price relatives and average them. Add the price relatives and divide them by the number of items. Table illustrates the construction of a simple index of wholesale prices.
| Commodity | Prices in 1970(P0) | Base 1970=100 |
Prices in 1980(P1) = P1/P0xl00 | Price Relatives
(R) |
| A Rs | . 20 per kg | 100 | Rs. 25 | 125 |
| В | 5 per kg | 100 | 10 | 200 |
| С | 15 per metre | 100 | 30 | 200 |
| D | 25 per kg | 100 | 30 | 120 |
| E | 200 per quantal | 100 | 450 | 225 |
| N = 5 | 500 | ∑R = 870 |
Price index in 1980 = Prices in 1980 / Prices in 1970 x 100
Or ∑P1/P0 x 100 = 870/500 x 100 = 174
Using arithmetic mean, price index in 1980 = ∑R/N = 870/5 = 174
The preceding table shows that 1970 is the base period and 1980 is the year for which the price index has been constructed on the basis of price relatives. The index of wholesale prices in 1980 comes to 174. This means that the price level rose by 74 per cent in 1980 over 1970.