Introduction to Statistics

0606102

College of Business Administration

Quantitative Methods Department

‫قـــســـم األســـاليـب الكميـــة‬ ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

‫قـــســـم األســـاليـب الكميـــة‬ ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Goals

1. Describe the term index.

2. Understand the difference between a weighted and an
unweighted index.
3. Construct and interpret a Laspeyres price index.
4. Construct and interpret a Paasche price index.
5. Construct and interpret a value index.
6. Explain how the Consumer Price Index is constructed and
interpreted.

‫قـــســـم األســـاليـب الكميـــة‬ 3 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers

An index number measures the relative change in price,

quantity, value, or some other item of interest from one
time period to another

A simple index number measures the relative change in

just one variable.

‫قـــســـم األســـاليـب الكميـــة‬ 4 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers
Example 1:
According to the Bureau of Labor Statistics, in January 1995 the
average hourly earnings of production workers was $11.47.
In June 2005 it was $16.07.
What is the index of hourly earnings of production workers for
June 2005 based on January 1995?

‫قـــســـم األســـاليـب الكميـــة‬ 5 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers
An index can also compare one item with another.
Example 2: The population of the Canadian province of British
Columbia in 2004 was 4,196,400 and for Ontario it was
12,392,700.
What is the population index of British Columbia compared to
Ontario?

‫قـــســـم األســـاليـب الكميـــة‬ 6 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers: Why Convert Data to

Indexes?:
- Converting data to indexes also makes it easier to assess the
trend in a series composed of exceptionally large numbers.
Example: Total U.S. retail sales for the month of July 2005 were
$357,013,000. For July 2004, the total retail sales were
$323,604,000. This increase of $33,409,000 appears significant.
Yet if the July 2005 retail sales are expressed as an index based
on July 2004 retail sales the increase is 10.3 percent.

‫قـــســـم األســـاليـب الكميـــة‬ 7 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Index Numbers : Indexes

- In many situations we wish to combine several items and develop an index
to compare the cost of this aggregation of items in two different time periods.
Example: We might be interested in an index for items that relate to
the expense of operating and maintaining an automobile. The items
in the index might include tires, oil changes, and gasoline prices.
Example: We might be interested in a college student index. This
index might include the cost of books, tuition, housing, meals, and
entertainment.
There are several ways we can combine the items to determine the index.

‫قـــســـم األســـاليـب الكميـــة‬ 8 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers : Indexes

- Unweighted Indexes
Simple Average of the Price Indexes
Simple Aggregate Index
- Weighted Indexes
Lespeyres Price Index
Paasche Price Index
- Fisher’s Price Index
- Value Index
- Special Purpose Index
Consumer Price Index
Producer Price Index
S&P Index

‫قـــســـم األســـاليـب الكميـــة‬ 9 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers : Unweighted Indexes

σ 𝑷𝒊
Simple Average of the Price relatives: P=
𝒏

Where 𝑷𝒊 refers to the simple index for each of the items

And n refers number of items

σ 𝒑𝒕
Simple Aggregate index: P= σ 𝒑𝟎
× 𝟏𝟎𝟎

Where σ 𝒑𝒕 refers to the sum of the prices (rather than indexes) for the period t
σ 𝒑𝟎 refers to the sum of the prices for the base period
‫قـــســـم األســـاليـب الكميـــة‬ 10 ‫كـليـــة إدارة األعمـــال‬
Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Simple Average - Example

Example:

‫قـــســـم األســـاليـب الكميـــة‬ 11 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Simple Aggregate Index – Example

Example:

‫قـــســـم األســـاليـب الكميـــة‬ 12 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers : Weighted Indexes

Laspeyres versus Paasche Index
When is Laspeyres most appropriate and when is Paasche the better choice?
Laspeyres
Advantages Requires quantity data from only the base period. This allows a more meaningful
comparison over time. The changes in the index can be attributed to changes in the price.
Disadvantages Does not reflect changes in buying patterns over time. Also, it may overweight
goods whose prices increase.
Paasche
Advantages Because it uses quantities from the current period, it reflects current buying habits.
Disadvantages It requires quantity data for the current year. Because different quantities are
used each year, it is impossible to attribute changes in the index to changes in price alone. It
tends to overweight the goods whose prices have declined. It requires the prices to be
recomputed each year.
‫قـــســـم األســـاليـب الكميـــة‬ 13 ‫كـليـــة إدارة األعمـــال‬
Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers : Weighted Indexes

σ 𝒑𝒕 𝒒𝟎
Lespeyres Price Index: P=σ × 𝟏𝟎𝟎
𝒑𝟎 𝒒𝟎

Where
𝑷 is the price index
𝒑𝒕 is the current price
𝒑𝟎 is the price in the base period
𝒒𝟎 is the quantity used in the base period

‫قـــســـم األســـاليـب الكميـــة‬ 14 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Index Numbers : Weighted Indexes

σ 𝒑𝒕 𝒒𝒕
Paasche Index : P= σ 𝒑𝟎 𝒒𝒕
× 𝟏𝟎𝟎

Where
𝑷 is the price index
𝒑𝒕 is the current price
𝒑𝟎 is the price in the base period
𝒒𝒕 is the quantity used in the current period

‫قـــســـم األســـاليـب الكميـــة‬ 15 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Lespeyres Price Index : Example

Example 1:

‫قـــســـم األســـاليـب الكميـــة‬ 16 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Lespeyres Price Index : Example

σ 𝒑𝒕 𝒒𝟎
Lespeyres Price Index: P=σ × 𝟏𝟎𝟎
𝒑𝟎 𝒒𝟎

σ 𝒑𝒕 𝒒𝟎 $𝟑𝟔𝟓.𝟔𝟎
P=σ × 𝟏𝟎𝟎 = × 𝟏𝟎𝟎 = 𝟏𝟎𝟖. 𝟖
𝒑𝟎 𝒒𝟎 $𝟑𝟑𝟔.𝟏𝟔

‫قـــســـم األســـاليـب الكميـــة‬ 17 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Paasche Price: Example

Ex 2 Exp 1

Example 2:

‫قـــســـم األســـاليـب الكميـــة‬ 18 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Paasche Price: Example

σ 𝒑𝒕 𝒒𝒕
Paasche Price Index : P= σ × 𝟏𝟎𝟎
𝒑𝟎 𝒒𝒕

σ 𝒑𝒕 𝒒𝒕 $𝟒𝟎𝟒.𝟓𝟗
P= σ × 𝟏𝟎𝟎= × 𝟏𝟎𝟎 = 𝟏𝟎𝟗. 𝟒
𝒑𝟎 𝒒𝒕 $𝟑𝟔𝟗.𝟕𝟑

‫قـــســـم األســـاليـب الكميـــة‬ 19 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Index Numbers : Fisher’s Ideal Index

- Laspeyres’ index tends to overweight goods whose prices have
increased.
- Paasche’s index, on the other hand, tends to overweight goods
whose prices have gone down.
Fisher’s ideal index was developed in an attempt to offset these
shortcomings.
It is the geometric mean of the Laspeyres and Paasche indexes.
Fisher’s ideal index= Laspeyres’ index × Paasche’s index

‫قـــســـم األســـاليـب الكميـــة‬ 20 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Fisher’s Ideal Index – Example

Ex 3 Exp 1,2

Example 3:

Determine Fisher’s ideal index for the data in previous Table

‫قـــســـم األســـاليـب الكميـــة‬ 21 ‫كـليـــة إدارة األعمـــال‬
Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Fisher’s Ideal Index – Example

Fisher’s ideal index= Laspeyres’ index × Paasche’s index

= 𝟏𝟎𝟖. 8 × 𝟏𝟎𝟗. 𝟒
=109.1

‫قـــســـم األســـاليـب الكميـــة‬ 22 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Value Index
A value index measures changes in both the price and quantities
involved.
A value index, such as the index of department store sales, needs
the original base-year prices, the original base-year quantities, the
present-year prices, and the present year quantities for its
construction.
Its formula is:
σ 𝒑𝒕 𝒒𝒕
Value Index : P= σ 𝒑𝟎 𝒒𝟎
× 𝟏𝟎𝟎

‫قـــســـم األســـاليـب الكميـــة‬ 23 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Value Index - Example

The prices and quantities sold at the Waleska Clothing Emporium for various
items of apparel for May 2000 and May 2005 are:

What is the index of value for May 2005 using May 2000 as the base
period?

‫قـــســـم األســـاليـب الكميـــة‬ 24 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Value Index - Example

Example:

‫قـــســـم األســـاليـب الكميـــة‬ 25 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
 Chapter 9: Index Numbers

Special Purpose Index: Consumer Price Index

The U.S. Bureau of Labor Statistics reports this index
monthly. It describes the changes in prices from one period to another for a
“market basket” of goods and services.

‫قـــســـم األســـاليـب الكميـــة‬ 26 ‫كـليـــة إدارة األعمـــال‬

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 Chapter 9: Index Numbers

Special Purpose Index: Producers Price Index

Formerly called the Wholesale Price Index, it dates back to
1890 and is also published by the U.S. Bureau of Labor Statistics.
It reflects the prices of over 3,400 commodities. Price data are collected from the sellers of
the commodities, and it usually refers to the first large-volume transaction for each
commodity. It is a Laspeyres-type index.

‫قـــســـم األســـاليـب الكميـــة‬ 27 ‫كـليـــة إدارة األعمـــال‬

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Chapter 9: Index Numbers

Special Purpose Index: Dow Jones Industrial Average (DJIA)

DJIA is an index of stock prices, but perhaps it would be better
to say it is an “indicator” rather than an index.
It is supposed to be the mean price of 30 specific industrial stocks.
However, summing the 30 stock prices and dividing by 30 does not calculate its value.
This is because of stock splits, mergers, and stocks being added or dropped.
When changes occur, adjustments are made in the denominator used with the average.

‫قـــســـم األســـاليـب الكميـــة‬ 28 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

Special Purpose Index: Dow Jones Industrial Average (DJIA)

By clicking on DJIA F you can find additional detail on changes. At the bottom center of the chart you
can change the horizontal scale to show the changes for a day, 5 days, and so on up to 5 years. In this
case we changed the scale to show the changes for a year. Information on the NASDAQ and the S&P
500 is available by clicking on them as well.

‫قـــســـم األســـاليـب الكميـــة‬ 29 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses

What is the CPI?

The CPI is an important economic indicator which measures the
changes in the total price of a basket of goods and services (called
the CPI basket) that are purchased by a large proportion of
metropolitan employee households.
The CPI measures the price movement and not the actual price
levels.
‫قـــســـم األســـاليـب الكميـــة‬ 30 ‫كـليـــة إدارة األعمـــال‬
Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses

The CPI has been used for a variety of purposes:

• in the development and analysis of government economic policy
• to determine the size and nature of wage adjustments by the Arbitration
Commission
• for the indexation of income ranges for income tax purposes by the
taxation department
• to adjust or index pension and superannuation payments and
• to adjust business contracts, rental agreements, building contracts,
insurance coverages, child support payments and some other transactions
which are tied in some manner to changes in CPI.

‫قـــســـم األســـاليـب الكميـــة‬ 31 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses - Formulas

𝑴𝒐𝒏𝒆𝒚 𝑰𝒏𝒄𝒐𝒎𝒆
Real Income= × 𝟏𝟎𝟎
𝑪𝑷𝑰

Example:

‫قـــســـم األســـاليـب الكميـــة‬ 32 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses - Formulas

Using an index as deflator
𝑨𝒄𝒕𝒖𝒂𝒍 𝒔𝒂𝒍𝒆𝒔
Deflated sales= × 𝟏𝟎𝟎
𝑨𝒏 𝒂𝒑𝒑𝒓𝒐𝒑𝒓𝒊𝒂𝒕𝒆 𝒊𝒏𝒅𝒆𝒙

The sales of Hill Enterprises, a small injection molding company in upstate New
York, increased from 1982 to 2015. The following table shows the increase.

‫قـــســـم األســـاليـب الكميـــة‬ 33 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses - Deflated sales Index

The owner, Harry Hill, realizes that the price of raw materials
used in the process
also has increased over the period, so Mr. Hill wants to deflate sales to account for
the increase in raw material prices. What are the deflated sales for 1990, 1995,
2000, 2005, 2010, and 2015 expressed in constant 1982 dollars?
Solution:

‫قـــســـم األســـاليـب الكميـــة‬ 34 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses - Deflated sales Index

The Producer Price Index (PPI) is an index released every
month and published in the Monthly Labor Review ; it is also available at the Bureau of Labor
Statistics website.
The prices included in the PPI reflect the prices the manufacturer pays for the
metals, rubber, and other purchased raw materials. So the PPI seems an appropriate
index to use to deflate the manufacturer’s sales.
Solution:

‫قـــســـم األســـاليـب الكميـــة‬ 35 ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business
Chapter 9: Index Numbers

CPI Uses - Formulas

Using an index to find purchasing power
$𝟏
Purchasing power of dollar= × 𝟏𝟎𝟎
𝑪𝑷𝑰
EXAMPLE
Suppose the Consumer Price Index this month is 200.0 (1982–84 = 100). What is the purchasing power of the
dollar?
SOLUTION
From formula (17–10), it is 50 cents, found by:
$𝟏
Purchasing power of dollar = × 𝟏𝟎𝟎 = $𝟎.𝟓𝟎
𝟐𝟎𝟎
The CPI of 200.0 indicates that prices have doubled from the years 1982–84 to this month.
Thus, the purchasing power of a dollar has been cut in half. That is, a 1982–84 dollar is worth only 50 cents this
month.

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Quantitative Methods Dept. College of Business
37

End of Chapter 9
Thank you

‫قـــســـم األســـاليـب الكميـــة‬ ‫كـليـــة إدارة األعمـــال‬

Quantitative Methods Dept. College of Business