ACKNOWLEDGEMENT

Bismillahirahmanirrahim,

Alhamdulillah. Thanks to Allah SWT whom with his willing giving me the opportunity to

complete this Additional Mathematics Project Work 4/2010 which is title Index Number In Daily

Life.

Firstly, I would like to express my deepest thanks to Encik Yusof, a teacher at MARA

Junior Science College Langkawi and also my entire additional mathematics teacher who had

guided be a lot of task during two semesters session 2009/2010.

Deepest thanks and appreciation to my parents, family, special mates of mine, and others

for their cooperation, encouragement, constructive suggestion and full of support for the project

work completion, from the beginning till the end. Also thanks to all of my friends and everyone,

those have been contributed by supporting my work and help myself during the project work till

it is fully completed.

OBJECTIVES
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 The aims of the project work are:

Acquire effective mathematical communication through oral and writing, and to

use the language of mathematics to express mathematical ideas correctly and

precisely.

Enhance acquisition of mathematical knowledge and skills through problem-

solving in ways that increase interest and confidence.

Prepare ourselves for the demand of our future undertakings and in workplace.

Realise that mathematics is an important and powerful tool in solving real-life

problems and hence develop positive attitude towards mathematics.

Use technology especially the ICT appropriately and effectively.

Train ourselves to appreciate the intrinsic values of mathematics and to become

more creative and innovative.

Realize the importance and the beauty of mathematics.

INTRODUCTION
History of Index Number

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An index number is an economic data figure reflecting price or quantity compared with a

standard or base value. The base usually equals 100 and the index number is usually expressed as

100 times the ratio to the base value. For example, if a commodity costs twice as much in 1970

as it did in 1960, its index number would be 200 relative to 1960. Index numbers are used

especially to compare business activity, the cost of living, and employment. They enable

economists to reduce unwieldy business data into easily understood terms.

In economics, index numbers generally are time series summarizing movements in a

group of related variables. In some cases, however, index numbers may compare geographic

areas at a point in time. An example is a country's purchasing power parity. The best-known

index number is the consumer price index, which measures changes in retail prices paid by

consumers. In addition, a cost-of-living index (COLI) is a price index number that measures

relative cost of living over time. In contrast to a COLI based on the true but unknown utility

function, a superlative index number is an index number that can be calculated. Thus, superlative

index numbers are used to provide a fairly close approximation to the underlying cost-of-living

index number in a wide range of circumstances.

There is a substantial body of economic analysis concerning the construction of index

numbers, desirable properties of index numbers and the relationship between index numbers and

economic theory.

History of Price Index

No clear consensus has emerged on who created the first price index. The earliest

reported research in this area came from Welshman Rice Vaughan who examined price level

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change in his 1675 book A Discourse of Coin and Coinage. Vaughan wanted to separate the

inflationary impact of the influx of precious metals brought by Spain from the New World from

the effect due to currency debasement. Vaughan compared labor statutes from his own time to

similar statutes dating back to Edward III. These statutes set wages for certain tasks and provided

a good record of the change in wage levels. Vaughan reasoned that the market for basic labor did

not fluctuate much with time and that a basic laborers salary would probably buy the same

amount of goods in different time periods, so that a laborer's salary acted as a basket of goods.

Vaughan's analysis indicated that price levels in England had risen six to eightfold over the

preceding century.

While Vaughan can be considered a forerunner of price index research, his analysis did

not actually involve calculating an index.[1] In 1707 Englishman William Fleetwood created

perhaps the first true price index. An Oxford student asked Fleetwood to help show how prices

had changed. The student stood to lose his fellowship since a fifteenth century stipulation barred

students with annual incomes over five pounds from receiving a fellowship. Fleetwood, who

already had an interest in price change, had collected a large amount of price data going back

hundreds of years. Fleetwood proposed an index consisting of averaged price relatives and used

his methods to show that the value of five pounds had changed greatly over the course of 260

years. He argued on behalf of the Oxford students and published his findings anonymously in a

volume entitled Chronicon Preciosum.

What are index numbers?

Index numbers are designed to measure the magnitude of economic changes over time.

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Because they work in a similar way to percentages they make such changes easier to compare.

Briefly, this works in the following way. Suppose that a cup of coffee in a particular café cost

75p in 1995. In 2002, an identical cup of coffee cost 99p. How has the price changed between

1995 and 2002?

The particular time period of 1995 which we've chosen to compare against, is called the

base period. The variable for that period, in this case the 75p, is then given a value of 100,

corresponding to 100%. The index can then be calculated for the later period of 2002 as a

proportionate change as follows:

The index number shows us that there has been a price increase of 32% since the base

period. An index number for a single price change like this is called a price relative.

Calculating Index Number

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 Index numbers characterize the magnitude of economic changes over time. They can

describe trends in a change of any economic data such as retail prices, an employment rate, a

company revenue or Gross Domestic Product. Index numbers are always calculated with respect

to a base period: a year, a month or a quarter.

Index number,

Q1
I= × 100
Q2

where Q 1=¿ quantity at the base time

Q 2 = quantity at the specific time

Price Index,

P1
I= P2 × 100

Where
P1 = price of the item at the base time

P2= price of the item at the specific time

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Composite Index

A composite index number measures the variation in the value of a composite number defined as

the aggregate of a set of elementary numbers (for example, the consumer price index measures

the variation in the prices of 1,000 varieties of products in a single index number).

The composite index number is a weighted mean of the elementary index numbers in

which the weighting represents the "mass" of the elementary numbers (in the case of price

indices, this mass is expenditure).

A Laspeyres index is weighted according to mass in the base period.

A Paasche index is weighted according to mass in the current period.

Composite Index,

⅀IiW
I = i
× 100
⅀Wi

Where I i = index number

w i = weightage

When there is no weigthage given,

Total ∑ of quantity ∨ price∈the year a

The Composite Index, I a ,b = × 100
Total ∑ of frequency∨ price∈the year b

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Chain Formula

Pa
I a ,b = ×100
Pb

P a Pc
= × × 100
Pc Pb

Where I a ,c and I b ,c are given

What is the important of Index Number?

Index numbers are of four types. They are price index numbers, quantity index numbers,

value index numbers and special purpose index numbers.

Price index numbers are useful for studying changes in price level.

Wholesale price index numbers reveal the changes in wholesale prices over a period of

time.

Retail price index numbers are useful for analyzing the changes in retail prices over a

period of time.

Quantity index numbers are useful to examine the changes in quantity consumed,

quantity produced, quantity distributed, quantity exported, quantity imported etc.over a

period of time.

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 Value index numbers are helpful to analyses the variations in values over a period of

time.

Special purpose index numbers are constructed for determining the changes in the prices

of a group of related items.

Index of Cost of construction, Index of cost of education is helpful for analyzing the

changes in the prices of related items.

Crime rate enables to study the changes in different forms of crime.

Industrial production, agricultural production indices reveal the changes in the respective

quantities over a period of time.

Index numbers are used in determining the purchasing power of money.

Index numbers are considered in the calculation of dearness allowance payable to

employees.

Index numbers are very useful in deflating. i.e., in the process of finding real values like

real wages, real income, real sales.

Index numbers are useful in studying seasonal variations.

Index numbers are useful in the formulation of economic and business policies.

Index numbers reveal trends and tendencies.

They are employed in forecasting future economic activity and in prediction

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 PART 1
The prices of goods sold in shops vary from one shop to another. Shoppers

tend to buy goods which are not only reasonably priced but also give value for their money.

I had carry out a survey on four different items based on the following

categories i.e. food, detergent, and stationery in three different shops.

(a) Those were pictures, newspaper cuttings and photos that I had been choose.

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 (b) Table 1 shows the items and the price of the goods

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 Category Item Price (RM)

Shop A Shop B Shop C

(a) Self-Raising Sugar 3.90 4.00 3.65

(b) Sugar (1 kg) 1.65 1.75 1.80

Food (c) Butter 3.89 3.50 3.80

(d) Eggs (Grade A) 4.00 4.69 3.89

Total Price 13.44 13.94 13.14

(a) Dynamo 17.49 17.50 17.15
(b) Breeze 20.00 19.50 19.49
(c) Top 10.99 10.89 9.90
Detergent
(d) Handalan 10.00 9.99 9.60

Total Price 58.48 57.88 56.14

(a) Pen 0.80 0.80 0.80
(b) Pencil 0.90 1.00 0.90

(c) Ruler 1.40 1.80 1.30

Stationery
(d) Eraser 0.80 0.70 0.80

Total Price 3.90 4.30 3.80

Grand Total 75.82 76.12 73.08

Table 1

( c) Graph to compare and contrast the prices of the items.

Food

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 5
4.5
4
3.5
3
Self-Raising Flour
2.5
Sugar
2 Butter
1.5 Eggs (Grade A)

1
0.5
0
Shop A Shop B Shop C

Detergent

25

20

15
Dynamo
Breeze
Top
10
Handalan

0
Shop A Shop B Shop C

Stationery

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 5

4.5

3.5

3
Pen
2.5 Pencil
Ruler
2 Eraser
1.5

0.5

0
Shop A Shop B Shop C

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(d)

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(e)

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 PART 2

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