Business Mathematics and Basic Statistics · Ch 8 — Index Numbers
Comparing the Three Methods
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Comparing the Three Methods
The three methods can give noticeably different index numbers for the very same set of commodities, because each one distributes "importance" among the commodities differently:
| Method | Formula | What decides each commodity's importance | Typical use |
|---|---|---|---|
| Simple Aggregate | Nothing — every commodity's raw price counts equally, regardless of how much is bought | A quick, rough gauge only; distorted by high-priced but rarely-bought items and by the units prices are quoted in | |
| Weighted Aggregate | The quantity (or other weight) actually consumed of each commodity, usually base-year quantity | A realistic general price index that reflects genuine buying patterns | |
| Cost of Living Index | Each commodity's own share of the household's total budget, | Measuring how much MORE a household must spend to keep the same standard of living |