Business Mathematics and Basic Statistics · Ch 8 — Index Numbers

Weighted Aggregate Method

The Weighted Aggregate Method corrects the Simple Aggregate Method's main weakness by attaching a weight $w$ to each commodity before adding — a number reflecting how much of that commodity is actually consumed or how important it is, so that a commodity bought in large quantity genuinely counts for more in the index than one bought only rarely.

Note

Weighted Aggregate Method

$P_{01} = \dfrac{\Sigma p_1 w}{\Sigma p_0 w}\times 100$

where $w$ is the weight assigned to each commodity — most commonly its base-year quantity, $w=q_0$ (this particular choice of weight is also known as the Laspeyres Price Index).

To apply the formula: for every commodity, multiply the base-year price by its weight to get $p_0 w$ , and multiply the current-year price by the SAME weight to get $p_1 w$ ; add each column to get $\Sigma p_0 w$ and $\Sigma p_1 w$ ; then divide and multiply by 100 exactly as before. The one rule that must never be broken is that the weight used for a given commodity is the SAME number in both the numerator and the denominator — only the price changes between the two years, never the weight. …

Start your 14-day free trial to unlock the full solution →

← Previous · 2Simple Aggregate Method Next · 4 →Cost of Living Index (Family Budget Method)