Uses of index numbers

• What are index numbers used for?

  To make comparisons between years and measure the magnitude of change over time
• How is a base year used in index numbers?

  A base year is assigned a value of 100 and is compared to other years
• If the base year is 2015 and inflation rises by 5% by 2018, what is the index number for 2018?

  105
• What does the index number measure in terms of economic variables?

  It measures the change in price over time
• In the calculation of the Consumer Price Index (CPI), which items have different weights?

  Different items in the basket of goods
• Why does food have a larger weighting than clothing in the CPI calculation?

  Because consumers spend more of their income on food
• What is the formula used to calculate the index number?


  $\left(\frac{P_n}{P_0}\right) \times 100$
• In the formula for index numbers, what does $P_0$ represent?


  The price level in the base year
• In the formula for index numbers, what does $P_n$ represent?


  The price in the year being compared
• How are weights assigned in the calculation of index numbers?

  Using the quantity of the unit being compared and the original price of the unit
• What is the total amount spent in the base year calculated as?

  $P_0 \times Q_0$
• How is the amount spent on each unit in a later year determined?

  It is calculated based on the price and quantity of the unit in that year