Chain index numbers, Financial Management

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Chain Index Numbers

So far, we have constructed index numbers with a fixed base. Sometimes, comparison between the current/given year and the base year becomes meaningless once time elapses making the base year remote. An index can be made more representative by using the chain base method of constructing index numbers. In this method, the base year is not fixed but changes from year to year. Here, new relatives are constructed for each year with the previous year as base. The new relatives enable comparison between one period and another period which succeeds it and hence referred to as 'Link relatives'. When these link relatives are associated to a common base, and chained together by successive multiplication, the formation of a chain index number results.

Chain index for a given year

1777_chain index numbers.png

where,

  Link relative =  348_chain index numbers1.png x 100

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