Simple Index Numbers

When every commodity in a group is treated as equally important, the index constructed is called a simple (or unweighted) index number. There are two standard methods.

(A) Simple Aggregative Method

Add up the current-year prices of all commodities and divide by the sum of their base-year prices:

This is quick, but it has a real weakness: commodities with large absolute prices (say, gold) dominate the total even if a household barely buys them, while cheap-but-essential items (say, salt) barely move the number. It also breaks down if the commodities are priced in different units.

(B) Simple Average of Price Relatives Method

Instead of aggregating raw prices, first convert each commodity's price into a relative ($\frac{p_1}{p_0}\times 100$), then average the relatives:

$P_{01} = \dfrac{\Sigma \left(\dfrac{p_1}{p_0}\times 100\right)}{n}$ …