Methods of Computing the Series of Index Numbers
As pointed out earlier, there are two methods of computing the series of index numbers. They are:
(i) Fixed base method and (ii) Chain base method. The index numbers computed by the fixed base method are called fixed base index numbers, or the Price relatives, or the quantity relatives as the case may be. The index numbers computed by the chain base method are called Chain base index numbers or the Link relatives. Both these methods are explained in detail as follows:
Fixed base Method
Under this method, the base year remains fixed for all the years of calculation. The base year price selected may be the price of a given year or the average of prices of a given number of years. In the absence of any instruction to this effect, the foremost year’s price is taken as the base year’s price; however, the formula for calculating the price indices under this method is as bellows:
P01 = (P1/P0) x 100
Where, P01 = Price index of the current year on the basic of the price of a fixed base year
P1= Price of the current year
P0 = Price of a fixed base year
For calculating the quantity indices under this method, the above formula will be modified as follows:
Q01 = (q1/q0) x 100
Where Q01 = quantity index of the current year on the basis of the quantity of a fixed base year
q1 = quantity of the current year
q0 = quantity of the fixed base year
Chain base method
Under this method, the base year’s price does not remain fixed but moves step from year to year. In other words, the immediately preceding year’s price becomes the base year’s price for each of the succeeding years. The formula for computing the indices under this method remains the same as displayed above except that the P0 and q0 represent the immediately preceding year’s price and quantity respectively.
