Index Numbers

Chapter 17

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Learning Objectives
LO17-1 Compute and interpret a simple, unweighted
index
LO17-2 Compute and interpret an unweighted aggregate
index
LO17-3 Compute and interpret a weighted aggregate
index
LO17-4 List and describe special-purpose indexes
LO17-5 Apply the Consumer Price Index

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Index Numbers

INDEX NUMBER A number that expresses the relative change in price,

quantity, or value compared to a base period.

 The major characteristics of an index are

 It is a percentage, but the percent sign is usually
omitted
 It has a base period
 The reasons for computing an index are
 To facilitate the comparison of unlike series
 If the numbers are very large, often it is easier to
comprehend the change of the index rather than the
change in numbers
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Hourly Wages Index Example

According to the Bureau of Labor Statistics, in 2000, the average hourly earnings of
production workers was $14.02. In January 2019, it was $27.56. What is the index of
hourly earnings of production workers for January 2019 based on 2000 data?

P= (100) = (100) = 196.58

Thus, the hourly earnings in 2019 compared to 2000 were 196.58%. This means
there was a 96.58% increase in hourly earnings during the period, found by
196.58 – 100.0 = 96.58

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Population Index Example

An index can also compare one item to another. The population of the Canadian
province of British Columbia in 2019 was 4,862,610, and for Ontario it was
14,374,084. What is the population index of British Columbia compared to Ontario?

The index of population for British Columbia is 33.9 found by:

P= (100) = (100) = 33.8

The population of British Colombia is 33.8% (about one-third) of the population of

Ontario, or another way to say that is the population of British Columbia is 66.2%
less than the population of Ontario (100 – 33.8 = 66.2)

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Airport Index Example
The following chart shows the number of passengers (in millions) for the 10 busiest
airports in the United States in 2014. Use the McCarran International Airport in
Las Vegas as the base. What is the index for the other airports compared to
Las Vegas?

To find the 10 indexes, divide the passengers for Las Vegas into the
passengers for the other 9 airports. So the index for Atlanta is 224.2
found by (96.2 ÷ 42.9) × (100) = 224.2
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E-Commerce Sales Index Example
 Converting data to indexes makes it easier to see the
trend in a series of very large numbers

For example
 US retail e-commerce sales in 2018 were $504,582,000
 In 2010, e-commerce sales were $168,895,000
 An increase of $335,687,000

Index = (100) = (100) = 298.8

This means 2018 sales increased 198.8% in the eight-year period.

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Construction of Index Numbers
 To calculate a simple price index P, using 100 as the base
value for any given year, use the formula below

Suppose the price of a fall weekend package at Tryon Mountain Lodge in western
North Carolina in 2000 was $450. The price rose to $795 in 2019. What is the price
index for 2019 using 2000 as the base period and 100 as the base value?

P= t
(100) = (100) = 176.7
0
The fall weekend package increased 76.7% from 2000 to 2019.

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Converting to Indexes using Different Base
Periods
Below is a table for prices of a Benson Automatic Stapler, Model 3, converted to
indexes using three different base periods. First, a single year (2015) is used and
each year’s price is divided by 20.
Next, two years (2015-2016) are used as the base; the base price of the stapler
would be $21, found by averaging the price of the stapler in the two years (20 +
22) ÷ 2 = $21and then dividing each year’s price by 21.
Finally, the prices $20, $22, $23 are averaged if we use three years (2015-2017) as
the base and then each year’s price is divided by 21.67 to obtain the price index.

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Unweighted Indexes
 In an unweighted index, we do not consider the quantities
 We may wish to combine several related items and
compare this group of items in two different time periods
 An index for items related to owning and operating an
automobile (tires, oil changes, and gasoline)
 An index for items related to expenses of a college
student (books, tuition, housing, meals, entertainment)
 In the simple average of price indexes, we add the simple
indexes for each item and divide by the number of items

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Simple Average of Price Indexes Example
This table reports the prices for several food items in 2009 and 2019. We
would like to develop an index for this food group for 2019 using 2009 prices
as the base. This is written 2009=100
First, we use formula 17-1 to compute the simple index for each food item.
For instance, the index for bread, P = t
(100) = (100) = 92.3
0
Now use formula 17-2 to compute the percentage change in the group.

P= i
= = = 98.5
The mean price of food decreased 1.5% 2009 to 2019.

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Simple Aggregate Price Index
 In a simple aggregate price index, the prices of the items
in the group are totaled for both periods and compared

The simple aggregate index for food for food items on the previous slide is found
by dividing the sum of prices in 2019 by the sum of the prices in 2009.

P= t
(100) = (100) = 103.7
0
This means that the aggregate group of prices had increased 3.7% from 2009 to
2019.

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Weighted Indexes: Laspeyres Method
 In a weighted index, the quantities are considered
 In the Laspeyres method, base period quantities are used
in both the base period and the given period

 Advantage of the Laspeyres method

 Only quantity data from the base period is used which
allows for more meaningful comparison over time
 Disadvantage
 Does not reflect changes in buying patterns over time
 It may overweight goods whose prices increase

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Laspeyres Price Index Example
First we determine the total amount spent for the six items in the base period, 2009.
To find this value, multiply the base period (2009) price for bread $1.381 by the base
period quantity of 50. The result is $69.2. Continue that for all items and total the
result. The base period total is $648.23.
The current year total is computed in a similar fashion. For bread, we multiply the
quantity in 2009 by the price of bread in 2019, 50 times $1.274 is $70.07. We make the
same calculation for the other items and total to get $667.783.

P= t t
(100) = (100) = 103.0
0 t

We conclude the price

of this group of items
has increased 3.0% from
2009 to 2019.

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Weighted Indexes: Paasche Method
 In the Paasche method, current period quantities are used

 Advantage of Paasche method

 Current buying habits are reflected
 Disadvantage
 It requires quantity data for the current year and it
tends to overweight goods whose prices have declined
 It requires the product of prices and quantities to be
recomputed each year

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Paasche Price Index Example
The following table shows the calculations to determine the Paasche index.

P= t t
(100) = (100) = 88.7
0 t
This result indicates that there has been an decrease of 11.3% in the price of this
“market basket” of goods between 2009 and 2019.

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Fisher’s Ideal Index
 Fisher’s ideal index is the geometric mean of the
Laspeyres and Paasche indexes

Determine Fisher’s ideal index for the data in Table 17-3 using our results
from the earlier examples.

Fisher’s ideal index =

=
So, Fisher’s ideal index is 95.6

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