Constructing index numbers - aggregates method, Financial Management

Assignment Help:

Aggregates Method

Under the aggregates method of constructing an index number, we could have unweighted aggregates index and the weighted aggregates index.

Unweighted Aggregates Index

An unweighted aggregates index is calculated by totalling the current year/given year's elements and then dividing the result by the sum of the same elements during the base period. To construct a price index, the following mathematical formula may be used

Unweighted Aggregates Price Index = 2024_Aggregates method.png x 100

where,     

 

369_Aggregates method1.png

 =  Sum of all elements in the composite for current year

1340_Aggregates method2.png

 =

Sum of all elements in the composite for base year

This is the simplest method of constructing index numbers. The example demonstrates the application of an unweighted index.

Construction of Unweighted Price Index

Elements in the composite

Prices (in Rs.)

 

 

2000

2001

 

(P0)

(P1)


Oranges (1 dozen)

20

28

Milk (1 liter)

5

8

LPG Cylinder

76

100


 

101

136


Unweighted aggregates price index = 1607_Aggregates method3.png




134.65
       

Above we measured changes in general price levels on the basis of changes in prices of a few items. While the year 2000 was taken as the base year, a comparison has been made between the prices of 2001 and that of the base year 2000. As evident, the price index was 134.65 which means that the prices rose by 34.65 percent from 2000 to 2001. By no means should this price index be interpreted as a reflection of the price changes of all goods and services as this calculation is a rough estimate. On inclusion of other items/elements and varying weights in the composite, with 2000 as the base year and 2001 as the current year, there is every possibility that the calculated price index would be different from the price index calculated earlier. This factor can be cited as one of the drawbacks of the simple unweighted index. The unweighted index does not reflect the reality since the price changes are not linked to any usage/consumption levels. On the other hand, a weighted index attaches weights according to their significance and hence is preferred to the unweighted index.

To make this clear, let us calculate the price index with the same data provided above but by changing the milk consumption from 1 liter to 100 liters. The following table provides the calculation of the price index.

Unweighted Price Index

                                                       (Rs. in crore)

 

Elements in the composite

Prices (in Rs.)

 

2000

2001

 

 

(P0)

(P1)


Oranges (1 dozen)

20

28

Milk (100 liters)

500

800

LPG Cylinder

76

100


 

596

928


Unweighted aggregates price index = 404_Aggregates method4.png



 = 155.70

Merely by changing the milk consumption in the composite, the unweighted price index changed from 134.65 to 155.70. As a result of ensuring that equal importance is given to all items in the composite irrespective of the consumption, the unweighted aggregates never gained much acceptance.

An unweighted aggregates quantity index and, an unweighted aggregates value index can be calculated on similar lines as calculated for price index. A mere substitution of quantities or values for prices in the equation   357_Aggregates method5.png  would suffice.


Related Discussions:- Constructing index numbers - aggregates method

FINANCIAL MANAGEMENT IS INTERDISCIPLINARY, RELATIONSHIP OF FINANCIAL MANAGE...

RELATIONSHIP OF FINANCIAL MANAGEMENT WITH OTHER BUSINESS FUNCTIONS

Define the matching principle of working capital financing, What is the mat...

What is the matching principle of working capital financing?  What are the advantages of following this principle? The matching principle is while short-term financing is employe

Timing of financial reports, Timing of Financial Reports: Just as the a...

Timing of Financial Reports: Just as the actual report requirements differ depending on the requirements of the stakeholder that will be using them, so too will the timing of t

Underwrite, Under write An arrangement under which the investment b...

Under write An arrangement under which the investment banks agree to purchase a certain amount of privacy of a new issue (typically an IPO) at a given date for a given pric

What do you mean by pension funds, What do you mean by pension funds? ...

What do you mean by pension funds? Pension funds: Pension funds give retirement income (as the form of annuities) to workers covered through a pension plan. They get cont

Define the concept of a real option, Define the concept of a real option. D...

Define the concept of a real option. Discuss some real options a firm can be confronted with when investing in real projects. A positive APV project is accepted under the supposi

Explain money have time value, Why does money have time value? Positive i...

Why does money have time value? Positive interest rates point out that money has time value.  While one person lets another borrow money, the first person needs compensation in e

Preparing the divestiture, Preparing the Divestiture No two divestiture...

Preparing the Divestiture No two divestitures are exactly alike and one of the foremost tasks of the project team is to determine precisely what is to be sold. While some dives

Define the negative consequences of a company holding, What are the negativ...

What are the negative consequences of a company holding too much cash? A company holding so much cash would be giving up the opportunity to invest much more in income producing a

Define the hirfindahl-hirschman index, What is the Hirfindahl-Hirschman Ind...

What is the Hirfindahl-Hirschman Index? A: The Hirfindahl-Hirschman Index, or HHI, is the standard measure employed by economists to evaluate market concentration. The greater

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd