Average of relatives method, Financial Management

Average of Relatives Method

We have seen the construction of an index number using the aggregates method. In this section, we shall see the construction of an index using the average of relatives method.

Unweighted Average of Relatives Method

As usual, let us begin with a price index. When a price index is constructed, all price relatives are to be obtained for all the items included in the index after which the average of price relatives is obtained using any one of the measures of central tendency namely, arithmetic mean, geometric mean, median, mode or harmonic mean. A price relative may be generally understood as the ratio of the price of a single item in a given period to its price in the base period.

Though theoretically, any measure of central tendency can be used to obtain the index, the general practice is to use arithmetic mean for averaging the price relatives. The price index using the average of relatives method can be constructed using the following formula:

Unweighted average of relatives index

2283_average of relative method.png


         P1      = Prices in the current/given year

         P0      = Prices in the base year

         n       = Number of products/items in the composite

The ratio P1/P0 is the price relative.

        Unweighted Average of Relatives Index

Elements in the composite



P1/P0 x 100
Jan, 20x0


June, 20x0






















Unweighted average of relatives price index =
696_average of relative method1.png




On similar lines, quantity index using average of relatives method can be computed with the help of the following formula:

Unweighted average of relatives quantity index =   1284_average of relative method2.png


         Q1     = Quantities in the given period

         Q0     = Quantities in the base year

         n       = Number of elements in the composite

The price index or the quantity index computed by the average of relatives method would be the same regardless of the way in which the prices are quoted or quantities are measured. In other words, price/quantity relatives are pure numbers and hence free from the units of measurement.

Also, the average of relatives method converts each element in the composite to a relative scale where each element is expressed in percentages and measured against a base of 100. The only impediment to such an index being constructed is the selection of an appropriate average. In general, arithmetic mean is used to take the average of the price relatives. As such, index is not influenced by extreme items. But the use of arithmetic mean, though simple and easy to understand, has a major disadvantage in that there is a tendency to over-emphasize increases and undervalue decreases. Though the use of geometric mean would overcome these tendencies, it is difficult to compute and its usage is avoided for this reason. The unweighted average of relatives method suffers from one or more limitations. The relatives (price/quantity) are assumed to have equal importance. As some relatives are economically more significant than others, assigning of equal weightages is undesirable.

Posted Date: 9/17/2012 3:01:21 AM | Location : United States

Related Discussions:- Average of relatives method, Assignment Help, Ask Question on Average of relatives method, Get Answer, Expert's Help, Average of relatives method Discussions

Write discussion on Average of relatives method
Your posts are moderated
Related Questions
I need assistance with 4 questions. How do I know someone can help me and have some idea of what it would cost before submitting the information? Also, how fast is the turnaround

VK Ltd a multi-product Company, furnishes you the following data relating to theyear 2000.First Half of the year Second Half of the yearSales Rs. 45,000 Rs. 50,000 Total Cost Rs. 4

Definition of 'Bank Credit': The amount of credit available to a business or individual from the banking system. It is the aggregate of the amount of funds financial instituti

a) Define monetary policy, and discuss the operation of monetary policy in the United States post-GFC.

evaluate the importance of leverage in financial management of a small scale company

What is working capital? Working capital contains the current assets of the firm.

A regional division of a water company is upgrading its water filtration & purification plant; the new system is expected to last 20 years & to cost $40m. The parent company has ha

Debenture Debenture is a document holding an acknowledgment of indebtedness on the part of organizations, usually secured by a charge on the company's assets.

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

Q. Explain about economic order quantity? The economic order quantity (EOQ) model is basis on a cost function for holding inventory which has two terms: holding costs as well a