Constructing Index Method

1. Aggregate expenditure technique: When this technique is applied to the quantities of commodities consumed by the particular group in the base year are estimated that constitute the weights. The prices of commodities for different groups for the present year are multiplied by the quantities consumed. In the base year, the aggregate expenditure increased in buying those commodities is obtained. In a similar manner the prices of the base year are multiplied by the quantities of the base year and the aggregate expenditure for the base period is obtained. The aggregate expenditure of the present year is divided by the aggregate expenditure of the base year and the quotient is multiplied by 100. Symbolically,

Consumer price index = (Σp₁q₀/Σp₀q₀) x 100

This is in fact the Laspeyres technique. This technique is the most popular technique for constructing a consumer price index.

2. Family budget technique: when this technique is applied the family budgets of a large number of people for whom the index is meant is carefully studied and the aggregate expenditure of an average family on different items is estimated. These constitute the weights. The weights are thus the value weights obtained by multiplying the prices of  quantities consumed and the price relatives for every commodity are obtained and these price relatives are multiplied by the value weights for every  item and the product is then divided by the sum of the weights symbolically,

Where p = (p₁/p₀) x 100 for each item V = value weights p₀q₀

This technique is the same as the weighted average of price relative technique.

Illustration:

Construct the consumer price index number for 2009 on the basis of 2008 from the following data using (i) the aggregate expenditure method and (ii) the family budget method.

Solution:

Computation of consumer price index number for 2009 (base 2008=100) by the aggregate expenditure

Consumer price index = (Σp₁q₀/Σp₀q₀) x 100 174/146.5 x100 = 118.77