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

Constructing the binomial interest rate tree, The fundamental princip...

The fundamental principle is that when a tree is used to value an on-the-run issue, the resulting value should be arbitrage free i.e., it should be equal to the o

Major advantages of preparing a statement of cash flow, QUESTION 1 ...

QUESTION 1 Part A i) Define the terms finance lease and operating lease and explain how you would distinguish between the two leases ii) When accounting for fina

International finance problem, International Finance Problem Analyze th...

International Finance Problem Analyze the attached case, along the lines indicated by the Assignment questions listed at the end of the case.  Since you will have plenty of tim

Award and signing of contract, A w ard of contract In previous sub se...

A w ard of contract In previous sub section you learnt in what situations you can negotiate. Now let us discuss the procedure for awarding the contract. Below are the step

What is the market risk premium in spain at the present, What is the market...

What is the market risk premium in Spain at the present moment - the number which I have to use in the valuations? It is not possible to talk of "the" market premium for Spain.

What is debentures, Q. What is Debentures? Debentures a debenture is an...

Q. What is Debentures? Debentures a debenture is an instrument issued by the company acknowledge its debts to its holders . it is also an important method of raising long terms

Cost of retained earnings , Cost of Retained earnings (K ) Retained ea...

Cost of Retained earnings (K ) Retained earnings are that portion of EPS that is retained by the firm.  This may be measured as the rate of return which the existing share hol

Type of hedge funds, What are the Types of Hedge Funds? Please provide me r...

What are the Types of Hedge Funds? Please provide me report on Types of Hedge Funds.

Review of career plans, Review of career plans: career plans, emerging out ...

Review of career plans: career plans, emerging out of career planning exercise, have long term orientation. A career plan is developed based on assumptions about how the environmen

Opportunity worth today, Assume that you can receive $25,000 per year forev...

Assume that you can receive $25,000 per year forever and that your cost of money is 7%.  What is this opportunity worth today?

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