Simple price index number



Simple price index number

Rice index number constructed giving equal weights to all commodities is called simple price index number, in this case, all commodities are given equal importance. The average price is calculated simply dividing the sum of prices by number of commodities.

Mathematically,

simple average price = sum of prices / no. of commodities

After the calculation of average price of base year and current year we change them into their relative values i.e. indices. The rice level of base year is treated as 100 and the price index of current year is calculated using the formula:

economics

Construction of simple price index number can be explained as following

commoditiesPrice in 2011Price in 2012
RiceRs 35Rs 40
PulsesRs 30Rs 95
ClothesRs 250Rs 275
VegetablesRs 50Rs 70
FirewoodRs 100Rs 150
TotalRs515Rs 630
Average (P/N)Rs 103Rs 126
Price index100(126/103)*100 = 122.33

 

In the above table, we have taken only 5 commodities for the sake of simplicity. The sum of the prices of the commodities in the year 2012 is Rs 515 and in the year 2012 is Rs 630. If we divide this sum of prices by number of commodities we obtain the price level of the year RS 103 and Rs 126 respectively. If we change these price levels to price indices using the above formula we obtain 100 and 122.33. It shows there is rise in price level b 22.33 % in the year 2012.

 

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