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

What is the required rate of return on the project, The risk free rate is 1...

The risk free rate is 10 percent and the expected return on the market portfolio is 14 percent. A firm considers a project that is expected to have a beta of 1.3, whereas the beta

Illustrate the term quality of benefits, Illustrate the term quality of ben...

Illustrate the term quality of benefits It is clear from Table that total returns associated with two alternatives are identical in a normal situation but range of variati

305, I have an assignment due today and needs some help

I have an assignment due today and needs some help

Why are trend analysis and industry comparison important, Why are trend ana...

Why are trend analysis and industry comparison important to financial ratio analysis? Trend analysis assists financial managers and analysts see if a company's current financia

Regarding the assigment below, a-ii, should i calculate the co-variance of ...

a-ii, should i calculate the co-variance of the 30 securities?

Management of sundry debtors, Management of Sundry Debtors: SUNDRY - M...

Management of Sundry Debtors: SUNDRY - Miscellaneous infrequent or small customers that are not given individual ledger accounts but are classified as a group. SUNDRY CREDI

Determine about the entity level - inherent risk, At entity level - Inheren...

At entity level - Inherent risk Integrity of management. Management's experience and knowledge Over reliance on key customers. Unusual pressures on management

Double declining balance method , Suppose that the business uses the double...

Suppose that the business uses the double declining balance method to depreciate  its equipment (a)  Determine the net book value, depreciation expense, and accumulated deprecia

Walter''s Model, Explain the effect of different dividend policies on the v...

Explain the effect of different dividend policies on the value of share respectively as per the walter model in Case 1: Dividend payout ratio is 50% Case 2: Dividend payout ratio

Conservative approach of financial management, Q. Conservative Approach of ...

Q. Conservative Approach of Financial Management? An exact matching plan may not be followed in practice. A firm may adopt a conservative approach in financing its current and

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