Weighted Relative Method

This method is popularly known as the weighted price relative method, or Family budget method. Under this method, index number is computed by the following formula:

P01 = ∑iv/ ∑v, Or ∑pv/ ∑v Or ∑pw/ ∑w

Where, P01 = Price Index of the current year w.r.t. the price of the base year,

I = Index of price, or price relative i.e. (P1/P0) X 100

and P01 =  ∑iv/ ∑v 

Weighted Relative Method

But, where V is taken as equal to P0 × q1, the result obtained by this method using the arithmetic mean equals the result that is obtained under Paasche’s aggregate method. This is because, the two formula equate as under:

Weighted Relative Method

Which is Paasche’s formula shown as above.

When geometric mean is used, the above formula of weighted price relatives, and their respective weights.

Merits
  • This method commands the following merits:
  • It is easy to understand, and simple to calculate.
  • It allows the use of both arithmetic and geometric means.
  • It allows the construction of different index numbers with a common base in a combined manner.
  • It is flexible in the sense in the sense that the old items may be easily replaced by the new ones.
  • The price, or quantity relatives of each of the items shown under this method serve themselves as the index numbers.
Demerits
  • This method suffers from the following demerits:
  • The computations work becomes tedious when geometric mean is used.
  • There is no definiteness as to the manner of weighting.
  • It does not satisfy the time reversal test and factor reversal test which are most important tests of consistency of a formula of index number.