CONSUMER PRICE INDEX (Coursework Sample)

INDEX NUMBER OR PRICE INDEX An index number of price index is a statistical device use to measure changes in price. quantity of value of a group of related items over a period of time such related items include: * Cash crops like Cocoa, Palm-kernel, Groundnut etc. * Food crops like Maize, Yam, Cassava etc. * Petroleum products like Kerosine, Petrol, Grease, Lubricant oil gas etc. PROBLEMS IN INDEX NUMBER CONSTRUCTION When one considers the shortcoming inherent in the various types of index number, one wonders if the purpose for which they are constructed will not be defeated. These are some major problems confronting the construction of index number or price index. * Choice of base year period: In the calculation of index number the use of a base year (reference year) is important. It is vital because the base year selected should be a year when prices of the related items in question are stable and their quantities reasonable since such a perfect year rarely to come which we should therefore not expect error free index number no matter the base year selected. * Selection of price: Price selection is a major problem in the index number because wide variety of difference prices even of the same commodity or the quantity of different commodities varies, index number base on prices is unreliable. * Selection of Commodity: Computation of index numbers involving groups of commodities, involves many problems which must be resolved such problem include the type commodities to be included, weigh their relative importance, what quantities of the same type of commodities to use. * Problem of measurement: The unit of measurement must be generally accepted, since different region have their own diverse measurement units. This makes it difficult to determine agreeable measurement units or scales. * Formular/ Average: The choice of a formular is another problem to be resolved, for example Laspeyres’s index or base year or Paasche’s index or current year etc. * Source of data: Source of data and time of collection matters, Data used should not vague, obsolete or irrelevant. Reliable and accurate data is necessary for price index. CALCULATION OF INDEX NUMBER There are many approaches devised to calculate an index number of price index among which includes: 1 Price Relative: it is one of the simplest examples of index number.it measures the ratio of the price of a simple commodity in a given period to its price in another period called the base year or reference period. It assumed that prices are constant over a period of time otherwise appropriate average for the period must be taken to make the assumption valid. That is PnP0*100%, Where Pn is denoted as current year price, P0 is denoted as base year price. EXAMPLE 1: Price of milk in 2021 is $2.00, Price of milk in 2023 is $3.00. 32*100%=150% The price of milk has increased by 50% in 2023 2 Quantity or Volume relative: Quantity Relative = QnQ0*100% 3 Values Relative: If p is the price of a commodity in a given period and q is the quantity of that same commodity that is sold then value is: =Price quantity=V.R= = VnV0*100% or pnqnpoq0*100% CONSTRCUCTION OF INDEX NUMBERS There are many methods that can be used to construct index number. 1 Simpe aggregate method. 2 Simple average of relative method. 3 Weighted aggregate method. 4 Weighted average of relative method. Simple aggregate method: under the simple aggregate method, the total of commodity prices in a given year is expressed as the percentage of total price in a base year. Simple aggregate price index (S.A.P.I) = ∑pn∑p0*100% Where ∑p0= Sum of all commodity prices in the base year or reference period. Where ∑pn= Sum of all commodity prices in the current year or given period. Example 1. Commodity 2021 2023 YAM 5 8 BEANS 10 12 RICE 3 4 TOTAL 18 24 (S.A.P.I) = ∑pn∑p0*100%= 2418*100%=133.3% Comment: the price of the food items mentioned above has increased by 33.3% between 2021 and 2023. ADVANTAGES OF SIMPLE AGGREGATE PRICE INDEX 1 Simpe to calculate and easy to understand DISADVANTAGES OF SIMPLE AGGREGATE PRICE INDEX 1 It does not take into account the relative important of various commodities that is, equal weight or importance would be attached to yam and beans. 2 The particular ...