Method of Constructing The Index

After the above-mentioned problems are carefully decided, the index may be constructed by applying any of the following methods:

1.    Aggregate Expenditure Method or Aggregative Method, and
2.    Family Budget Method or the Method of Weighted Relatives

1. Aggregate Expenditure Method.

When this method is applied the quantities of commodities consumed by the particular group in the base year are estimated which constitute the weights. The prices of commodities for various groups for the current year are multiplied by the quantities consumed in the base year and the aggregate expenditure in buying those commodities is obtained. In a similar manner prices of the base year are multiplied by the quantities of the base year and aggregate expenditure for the base period is obtained. The aggregate expenditure of the current year is divided by the aggregate expenditure of the base year and the quotient is multiplied by 100. Symbolically,
    Consumer Price Index =

This is in fact the Laspeyres method discussed earlier. This method is the most popular method for constructing consumer price index.

2. Family Budget Method.

When this method is applied the family budgets of a large number of people for whom the index is meant are carefully studied and the aggregate expenditure of an average family on various items is estimated. These constitute the weights. The weights are thus the value weights obtained by multiplying the prices by quantities consumed (i.e., p₀q₀). The price relatives for each commodity are obtained and these price relatives are multiplied by the value weights for each item and the product is divided by the sum of the weights. Symbolically

    Consumer Price Index = ∑PV/∑V

Where, P = P₁ / P₀  X 100 for each item; V = Value weights i.e., p₀q₀.

This method is the same as the weighted average of price relatives method discussed earlier. It should be noted that the answer obtained by applying the aggregate expenditure method and the family budget method shall be the same.

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