Simple price index is a percentage ratio that represents a comparison for a single commodity. For example, let the price of a calculator is $60 in 2005 and $80 in 2006. To compare the two prices, the price of one of the time periods is fixed as 100 and in this case it is the price of 2005. Therefore 2005 is base period and 60$ is base price. Similarly 2006 is the current period and $80 is current price. This current price is now converted into percentage relative to the base price i.e. 80/60*100 = 133.33%. This percentage is called price relative or simple price index. The concept of simple price index can be elaborated with the help of simple problem.
Problem: The prices of petrol for the period 1988 to 1990 are given below:
Calculate price relatives taking (1) 1988 as base year (2) 1989 as base year (3) Chain base method.
The formula for calculating simple price index is given as:
1988 as Base Year
1989 as Base Year
Chain Base Method
Summary of Results
The results of the problem are summarized in the table given below.
From the above table it is evident that the index for the base period is 100. The table also shows that the change in the value of the index from the base period to any given period is simply a measure of percentage change from the base period.