Professional Documents
Culture Documents
Index Numbers and Ratios
Index Numbers and Ratios
When facing a lack of a unit of measure, we often use indicators as surrogates for direct
measurement. For example, the height of a column of mercury is a familiar indicator of
temperature. No one presumes that the height of mercury column constitutes temperature
in quite the same sense that length constitutes the number of centimeters from end to end.
However, the height of a column of mercury is a dependable correlate of temperature and
thus serves as a useful measure of it. Therefore, and indicator is an accessible and
dependable correlate of a dimension of interest; that correlate is used as a measure of that
dimension because direct measurement of the dimension is not possible or practical. In
like manner index numbers serve as surrogate for actual data.
The primary purposes of an index number are to provide a value useful for comparing
magnitudes of aggregates of related variables to each other, and to measure the changes
in these magnitudes over time. Consequently, many different index numbers have been
developed for special use. There are a number of particularly well-known ones, some of
which are announced on public media every day. Government agencies often report time
series data in the form of index numbers. For example, the consumer price index is an
important economic indicator. Therefore, it is useful to understand how index numbers
are constructed and how to interpret them. These index numbers are developed usually
starting with base 100 that indicates a change in magnitude relative to its value at a
specified point in time.
For example, in determining the cost of living, the Bureau of Labor Statistics (BLS) first
identifies a"market basket" of goods and services the typical consumer buys. Annually,
the BLS surveys consumers to determine what they buy and the overall cost of the goods
and services they buy: What, where, and how much. The Consumer Price Index (CPI) is
used to monitor changes in the cost of living (i.e. the selected market basket) over time.
When the CPI rises, the typical family has to spend more dollars to maintain the same
standard of living. The goal of the CPI is to measure changes in the cost of living. It
reports the movement of prices, not in dollar amounts, but with an index number.
Period 2
Items
q1 =
p1 =
q1 =
p1 =
Quantity Price Quantity Price
Apples
10
$.20
$.25
Oranges
$.25
11
$.21
Months
Plant Type - A
Unit
Man Hours
Unit
Plant Type - B
Man Hours
Output
0283
200000
Output
11315
0760
680000
300000
12470
720000
1195
530000
13395
750000
Standard
4000
600000
16000
800000
The labor utilization for the Plant A in the first month is:
LA,1 = [(200000/283)] / [(600000/4000)] = 4.69
Similarly,
LB,3 = 53.59/50 = 1.07.
Upon computing the labor utilization for both plants for each month, one can present the
results by graphing the labor utilization over time for comparative studies.
You might like to use the Index Numbers JavaScript to check your hand computation.
Unit Needed
20
02
02
Unit Cost
10
100
50
Total
200
200
100
500
Unit Cost
11
110
60
Total
220
220
120
560
From the information given in the above table, the index for the two consecutive years
are 500/500 = 1, and 560/500 = 1.12, respectively.
Further Readings:
Watson C., P. Billingsley, D. Croft, and D. Huntsberger, Statistics for Management and Economics, Allyn & Bacon, Inc.,
1993.
where k is the number of categories, fi is the number of ratings in each category, and N is
the total number of rating. D is a number between zero and 1 depending if all ratings fall
into one category, or if ratings were equally divided among the k categories.
An Application: Consider the following data with n = 100 participants, k = 5 categories,
f1 = 25, f2 = 42, and so on.
Category
A
B
C
D
E
Frequency
25
42
8
13
12
The Body Mass Index (BMI) serves as an estimate of body composition. That is the ratio
of fat to muscle and bone based on your height and weight. BMI model is the ratio of the
weight (kilograms) to the height (meters) squared. i.e.:
BMI = weight / height2.
This model is valid for both men and women 18 years of age or older. The BMI is
believed to be a reliable indicator of total body fat, which is related to the risk of disease
and death. Statistics has shown that obesity-related causes of death in the U.S. are over 16
percent of all deaths.
Body Fat Test: Since the BMI may overestimate for people who have a muscular build
and underestimate for people who have lost muscle mass, therefore, a more accurate tool
is the Body Fat Test that performed by your physician.
The following table provides a generally accepted classification:
A Classification of Body Mass Index (BMI)
Underweight
BMI 25 to 29.9
Obese
BMI 30 or greater
You might like to use the Index Numbers JavaScript to check your hand computation.
Si = Di/D,
where:
Si = the seasonal index for ith period,
Di = the average values of ith period,
D = grand avrage,
i = the ith seasonal period of the cycle.
A seasonal index of 1.00 for a particular month indicates that the expected value of that
month is 1/12 of the overall average. A seasonal index of 1.25 indicates that the expected
value for that month is 25% greater than 1/12 of the overall average. A seasonal index of
80 indicates that the expected value for that month is 20% less than 1/12 of the overall
average.
Deseasonalizing Process: Deseasonalizing the data, also called Seasonal Adjustment is
the process of removing recurrent and periodic variations over a short time frame (e.g.,
weeks, quarters, months). Therefore, season variations are regularly repeating movements
in series values that can be tied to recurring events. The Deseasonalized data is obtained
by simply dividing each time series observation by the corresponding seasonal index.
Almost all time series published by the government are already deseasonalized using the
seasonal index to unmasking the underlying trends in the data, which could have been
caused by the seasonality factor.
A Numerical Application: The following table provides monthly sales ($000) at a
college bookstore.
M
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
196
188
192
164
140
120
112
140
160
168
192
200
1972
200
188
192
164
140
122
132
144
176
168
196
194
2016
196
212
202
180
150
140
156
144
164
186
200
230
2160
242
240
196
220
200
192
176
184
204
228
250
260
2592
Mean:
208.6 207.0 192.6 182.0 157.6 143.6 144.0 153.0 177.6 187.6 209.6 221.0
Index:
1.14
1.14
1.06
1.00
0.87
0.79
0.79
0.84
0.97
1.03
1.15
2185
1.22
12
The sales show a seasonal pattern, with the greatest number when the college is in session
and decrease during the summer months. For example, for January the index is:
S(Jan) = D(Jan)/D =208.6/181.84 = 1.14,
where D(Jan) is the mean of all four January month, and D is the grand mean of all past
four years sales.
You might like to use the Seasonal Index JavaScript to check your hand computation. As
always you must first use Plot of the Time Series as a tool for the initial characterization
process.
For testing seasonality based on seasonal index, you may like to use Test for Seasonality
JavaScript.
For modeling the time series having both the seasonality and trend components, visit the
Business Forecasting site.