Simple Price Index or Price Relative

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.

Solution:

The formula for calculating simple price index is given as:

1988 as Base Year

1989 as Base Year

Chain Base Method

Summary of Results