03 Index Number

Index Numbers
1.Price Relatives
2.Aggregate Price Indexes
3.Deflating a Series by Price
Indexes
Price Relatives
Index Numbers
▪ Index is a system of numbers used for comparing values of
things that change according to each other or a fixed standard (
https://dictionary.cambridge.org/)
▪ A variety of indexes designed to help individuals understand

current business and economic conditions.
▪ Perhaps the most widely known and cited of these indexes is
the Consumer Price Index (CPI).
▪ CPI can be used to compare current period consumer prices
with those in the base period.
Price Relatives
▪ A price relative shows how the current price
per unit for a given item compares to a base
period price per unit for the same item.
▪ A price relative expresses the unit price in
each period as a percentage of the unit price
in the base period.
▪ A base period is a given starting point in
time.
Price Relatives
▪ The 2008 price relative of 250.0 shows a
150% increase in the price of regular
gasoline from the 1990 base-year price.
▪ The price relative of 85.4 in 1995 shows
that the price of gasoline in 1995 was
14.6% below the 1990 base-year price.
▪ The 2002 price relative of 103.1 shows a
3.1% increase in the gasoline price in
2002 from the 1990 base-year price.
Aggregate Price Indexes
Aggregate Price Indexes
▪ We are often interested in the general price change for a group of items
taken as a whole
▪ For example, if we want an index that measures the change in the
overall cost of living over time
▪ An aggregate price index is developed for the specific purpose of
measuring the combined change of a group of items
▪ An unweighted aggregate price index in period t, denoted by It, is
given by
▪ Pit = unit price for item i in period t

▪ Pi0= unit price for item i in the base period
Unweighted Aggregate Index
▪ An unweighted aggregate index for normal automotive operating

expenses in 2008 (t=2008) is given by
Weighted Aggregate Price Index
▪ The philosophy behind the weighted aggregate price index is that each
item in the group should be weighted according to its importance
▪ In most cases, the quantity of usage is the best measure of importance
▪ Let Qi = quantity of usage for item i. The weighted aggregate price
index in period t is given by
Weighted Aggregate Price Index
▪ Let t=2008 and use the quantity weights in Table
17.4. We obtain the following weighted aggregate
price index for automotive operating expenses in
2008
▪ From this weighted aggregate price index, we

would conclude that the price of automotive
operating expenses has increased 94% over the
period from 1990 through 2008
▪ The weighted index provides a more accurate
indication of the price change over the 1990–2008
period case
Laspeyres Index
▪ In the weighted aggregate price index formula, the quantities Qi are
considered fixed and do not vary with time as the prices do.
▪ In a special case of the fixed-weight aggregate index, the quantities are
determined from base-year usages. In this case we write Qi = Qi0, with
the zero subscript indicating base year quantity weights; the previous
weighted aggregate price index formula becomes.
▪ Whenever the fixed quantity weights are determined from base-year

usage, the weighted aggregate index is given the name Laspeyres
index.
Paasche Index
▪ Another option for determining quantity weights is to revise the
quantities each period.
▪ A quantity Qit is determined for each year that the index is computed.
The weighted aggregate index in period t with these quantity weights
is given by
▪ This weighted aggregate index is known as the Paasche index

▪ This method presents two disadvantages: Qit must be redetermined
each year, thus adding to the time and cost of data collection, and each
year the index numbers for previous years must be recomputed to
reflect the effect of the new quantity weights.
Deflating a Series by Price Indexes
▪ In order to correctly interpret business activity over time when it is
expressed in dollar amounts, we should adjust the data for the price-
increase effect. Removing the price-increase effect from a time series
is called deflating the series.
▪ Deflating actual hourly wages results in real wages or the purchasing
power of wages.
▪ The deflated series is found by dividing the hourly wage rate in each year by
the corresponding value of the CPI and multiplying by 100.

03 Index Number

Uploaded by

Copyright:

Available Formats

03 Index Number

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

03 Index Number

Uploaded by

Copyright:

Available Formats

Index Numbers

▪ A variety of indexes designed to help individuals understand

▪ Pit = unit price for item i in period t

▪ An unweighted aggregate index for normal automotive operating

▪ From this weighted aggregate price index, we

▪ Whenever the fixed quantity weights are determined from base-year

▪ This weighted aggregate index is known as the Paasche index

You might also like