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

State about the financing mbo, State about the Financing MBO There are ...

State about the Financing MBO There are many sources of finances available for an MBO Venture capitalists Merchant banks Institutional investors such as pension funds

Dividend policy, #questThe managing directors of three profitable listed co...

#questThe managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends

Define the replacement value of assets method, Why is the replacement value...

Why is the replacement value of assets method not usually used to value complete businesses? The replacement value of assets process is not often applied to complete business v

Buy down loans, The buy down loan is similar to the PAM; however, it ...

The buy down loan is similar to the PAM; however, it is the seller of the property and not the buyer/borrower who places cash in a segregated account so that additional

What are the motives of holding cash, Q. What are the Motives of Holding Ca...

Q. What are the Motives of Holding Cash? Motives of Holding Cash: - In every business assets are kept for the reason that they generate profit. But cash is an asset which doesn

Explain medium term expenditure framework, Question 1: The various crit...

Question 1: The various criteria for evaluating a revenue measure or system are: ? Yield ? Political expediency ? Consistency with economic and social goals ?

Identify the parties by name that have an obligation, Identify the parties ...

Identify the parties by name that have an obligation: a. Buyer/Alpha hears a rumor that the toys have not been manufactured according to the expected specifications for such t

FINANCIAL RISK MGT, DQ #1: Discuss the challenges of VaR approaches in valu...

DQ #1: Discuss the challenges of VaR approaches in valuing risk. How does portfolio risk assessment differ from a single asset’s risk assessment? How do managers typically load ba

Buying and selling securities, Buying and Selling Securities One of the k...

Buying and Selling Securities One of the key features that may occur while investing in financial markets is that sometimes investors overlook the essential factors they should c

Evaluation and assessing probability of management risk, Evaluation: On...

Evaluation: Once all the possible events are identified, the next step in the risk management process is to evaluate the events. As stated previously, the evaluation process wo

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