Fixed Base Method

In fixed base method, a particular year is generally chosen arbitrarily and the prices of the subsequent years are expressed as relatives of the prices of the base year. Sometimes instead of choosing a single year as the base, a period of a few years is chosen and the average price of this period is taken as the base year’s price. The year which is selected as a base should be normal year or in other words, the price level in this year should neither be abnormally low nor abnormally high. If an abnormal year is chosen as the base, the price relatives of the current year calculated on its basis would give misleading conclusions. For example, a year in which war was at its peak, say the year 1965, is chosen as a base year, the comparison of the price level of the subsequent years to the prices of 1965 is bound to give misleading conclusions. The reason is that the price level in the year 1965 was abnormally high. In order to remove this difficulty associated with the selection of a normal year, the average price of a few years is sometimes taken as the base price. The fixed base method is used by the Government in the calculation of national index numbers.

In Fixed Base,
Price relative for current year {\text{ =  }}\frac{{{\text{Price of Current Year}}}}{{{\text{Price of Base Year}}}} \times  100
                        Or

{P_{on}} = \frac{{{P_n}}}{{{P_o}}} \times  100

Example:

Find index numbers for the following data taking 1980 as base year.

Years

1980

1981

1982

1983

1984

1985

1986

1987

Price

40

50

60

70

80

100

90

110

Solution:
           

Year

Price

Index No’s 1980as base
{P_{on}} = \frac{{{P_n}}}{{{P_o}}} \times 100

1980

40

\frac{{40}}{{40}} \times 100 = 100

1981

50

\frac{{50}}{{40}} \times 100 = 125

1982

60

\frac{{60}}{{40}} \times 100 = 150

1983

70

\frac{{70}}{{40}} \times 100 = 175

1984

80

\frac{{80}}{{40}} \times 100 = 200

1985

100

\frac{{100}}{{40}} \times 100 = 250

1986

90

\frac{{90}}{{40}} \times 100 = 225

1987

110

\frac{{110}}{{40}} \times 100 = 275