2.3 index numbers

• Index numbers are used to compare data without emphasizing the units of measurement, which is particularly useful when analyzing macroeconomic variables such as inflation.
• index numbers:

  They express data relative to a given base value (usually the base year value is set to 100).
• index number = (value at time t/value in base year) x 100
• Index Numbers as Averages:

  • A weighted average of different indices can be used to derive a single measure.
• to find weighted averages: weight x index
• Weights:

  • Reflects the purpose for which the index is constructed 
  • They always add up to 1
• Weighted average:

  • Index number constructed by combining multiple individual indices 
  • Shows the group relative change 
  • They are always between individual indices 
  • Weights determine which it is closer to
• CPI : consumer price index

  • Measures : changes in the cost of living by looking at the cost of standard ‘shopping basket of goods’
• CPI: Steps of construction:

  • Individual indices of goods groups 
  • Weighted average of them 
• The CPI does not include:

  • Mortgage interest payments 

  It was the measurement of inflation target in UK
• RPI: retail price index : 

  • Changes in the cost of living by looking at the cost of standard shopping basket of goods 
• RPI Steps of construction:

  • Individual indices of goods groups
  • Weighted average of them 
• RPI does include:

  • Mortgage interest payments 
• RPI Is the measurement of inflation target in UK & EU
• Both indices (CPI & RPI) overstate the cost of living because they inaccurately measure the change in quality of life
• Inflation rate:

  Annual rate of change of the CPI 

  the rate at which prices increase over time, resulting in a fall in the purchasing value of money
• Other indices:

  • Index of waves in manufacturing 
  • Weighted average of wages in different manufacturing industries 
  • Index of industrial production
  • Weighted average of the quantity of goods produced by industry 
  • Financial times stock exchange index (FTSE)
  • Index of share prices quotes on the London stock exchange