Index Numbers

Week - 6
Index Numbers
An index number is a number that
measures the relative change in price,
quantity, value, or some other item of
interest from one time period to another.
An index can be classified as a price
index, a quantity index, a value index, or
a special-purpose index.

The major characteristics of an index
It is percentage, but the percent sign is
usually omitted
It has a base period
The base of most indexes is 100
The ways to determine the base period :
When economy is stable relatively
Base period must be up to date
A significant period

Why Convert Data to Indexes?
Indexes facilitate a comparison of unlike
series.
An index is a convenient way to express
the change in the total of a heterogeneous
group of items.
A percent change is often easier to
comprehend than actual numbers,
especially when the numbers are
extremely large.
Types of Price Indexes
Unweighted indexes
Simple index
Simple aggregate price index
Simple relative average of price index
Weighted indexes
Aggregate
Laypeyres
Paasche
Drobisch and Fisher indexes
Relative Weighted relative average of price
index

Unweighted Indexes
Simple Index
A simple index number is an index number
that is used to measure the relative change in
just one variable. It is the ratio of two values
of the variable expressed as a percentage.
Let Po be the base period price, and Pn be
the price at the selected or given period.
Thus, the simple price index is given by:


The base period need be not a single year



100 x
P
P
I
o
n
=
Example
Indeks Indeks Indeks
(Jan=100) (Mar=100) (Apr-Jun=100)
Jan 250 100 90,9 92,6
Peb 240 96,0 87,3 88,9
Mar 275 110,0 100 101,9
Apr 250 100,0 90,9 92,6
Mei 260 104,0 96,3
Jun 300 120,0 111,1
270
Bulan Harga
Harga rata-rata (Apr-Jun) =
Cont..
Simple Aggregate Index


Because the value can be influenced by
the unit of measurement, it is not used
frequently






100 x
P
P
I
o
n

=
Example
Simple Aggregate Index
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10
Minyak (ltr) 40 10 60 10
Susu (kaleng) 50 5 80 6
120 23 190 26
I = 158.3
Jenis Barang
2001 2002
(190/120)x100 =
Simple Aggregate Index
Harga Kuantitas Harga Kuantitas
Beras (ton) 30,000 8 50,000 10
Minyak (ltr) 40 10 60 10
Susu (kaleng) 50 5 80 6
30,090 23 50,140 26
I = 166.6
Jenis Barang
2001 2002
(50.140/30.090)x100 =
Cont..
Simple Relative Average of Price Index



A positive feature : we would obtain the
same value for the index regardless of the
unit of measure
A negative feature : It fail to consider the
relative importance of the item included in
the index





k
x
P
P
I
o
n
100

=
Example
Simple Relative Average Price of Index
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 166.7
Minyak (ltr) 40 10 60 10 150.0
Susu (kaleng) 50 5 80 6 160.0
120 23 190 26 476.7
I = 158.9 476,7/3 =
(P'02/P'01)x100 Jenis Barang
2001 2002
Weighted Indexes
Laspeyres Weighted Price Index, L: This method
uses the base period quantities as weights.


The advantage : It requires quantity data from
only the base period. This allow a more
meaningful comparison over time. The
changes in the index can be attributed to
change in the price
The disadvantages : It doesnt reflect changes
in buying patterns over time. Also, it may
overweight goods whose price increase
100 x
Q P
Q P
L
o o
o n

=
Example
2001=100
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 400 240
Minyak (ltr) 40 10 60 10 600 400
Susu (kaleng) 50 5 80 6 400 250
120 23 190 26 1.400 890
L = 157,3 157,3033708
Pt*Qo Po*Qo
Jenis
Barang
2001 2002
Cont..
Paasche Weighted Price index, P: Here the
present year weights are substituted for the
original base period weights.



The advantage : It reflects current buying habits.
The disadvantages :
It requires quantity data for each year, which may be
difficult to obtain.
It is impossible to attribute change in the index to
change in price alone
It tend to overweight the goods whose prices have
decline


100 x
Q P
Q P
P
n o
n n

=
Example
Paasche Index
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 500 300
Minyak (ltr) 40 10 60 10 600 400
Susu (kaleng) 50 5 80 6 480 300
120 23 190 26 1,580 1,000
P = 158.0
P'02xQ'02 P'01xQ'02
(1.580/1000)x100 =
Jenis
Barang
2001 2002
Cont..
Drobish Weighted Price Index, D.


Fisher Weighted Price Index, F.


Fishers ideal index


2
P L
D
+
=
) )( ( P L F =
Example
Drobisch
D = (157,3 + 158,0)/2 = 157,7

Fisher

7 , 157 ) 0 , 158 3 , 157 = = x F
Cont..
Weighted relative average of Price Index



W is value usually




100 x
W
xW
P
P
I
o
n

|
|
.
|

\
|
=
Example
Weighted relative average of price index (W=value2001)
W
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 240 400
Minyak (ltr) 40 10 60 10 400 600
Susu (kaleng) 50 5 80 6 250 400
120 23 190 26 890 1,400
D = 157.3
P'01xQ'01 (P'02/P'01)xW
(1.400/890)x100 =
Jenis
Barang
2001 2002
Value Index
A VALUE INDEX, V. Here both the price
and quantity change from the base period
to the given period. A value index reflects
changes in both price and quantity.





100
0 0
x
Q P
Q P
V
n n

=
Example
Value Index
Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 500 240
Minyak (ltr) 40 10 60 10 600 400
Susu (kaleng) 50 5 80 6 480 250
120 23 190 26 1,580 890
V = 177.5
P'01xQ'01
(1.580/890)x100 =
Jenis
Barang
2001 2002
P'02xQ'02
Chain Indexes
Simple chain index


Weighted aggregate chain index


Weighted relative chain index
100
1
x
W
xW
P
P
I
n
n

|
|
.
|

\
|
=

100
1
x
P
P
I
n
n

=
100
) (
) (
1
x
W P
W P
I
n
n

=
Simple chain index
Jan 250
Peb 240 96.0
Mar 275 114.6
Apr 250 90.9
Mei 260 104.0
Jun 300 115.4
Bulan Harga Chain Index
Weighted aggegate chain index (W=Vo)
Harga Kuantitas Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 60 9
Minyak (ltr) 40 10 60 10 60 12
Susu (kaleng) 50 5 80 6 100 8
120 23 190 26 220 29
W'01 W'02
P'01xQ'01 P'02xQ'02 P'02xW'01 P'01xW01 P'03xW'02 P'02xW'02
240 500 12,000 7,200 30,000 25,000
400 600 24,000 16,000 36,000 36,000
250 480 20,000 12,500 48,000 38,400
890 1,580 56,000 35,700 114,000 99,400
Indeks
Th 2002 = (56.000/35.700)x100 = 156.9
Th 2003 = (114.000/99.400)x100 = 114.7
Jenis Barang
2001 2002 2003
Weighted relative chain index (W=Vo)
Harga Kuantitas Harga Kuantitas Harga Kuantitas
Beras (kg) 30 8 50 10 60 9
Minyak (ltr) 40 10 60 10 60 12
Susu (kaleng) 50 5 80 6 100 8
120 23 190 26 220 29
W'01 W'02
P'01xQ'01 P'02xQ'02
240 500
400 600
250 480
890 1,580
Indeks
Th 2002 = (1.400/890)x100 = 157.3
Th 2003 = (1.800/1580)x100 = 113.9
1,400 1,800
600 600
400 600
(P'02/P'01)xW'01 (P'03/P'02)xW'02
400 600
Jenis Barang
2001 2002 2003
Special-Purpose Indexes
A SPECIAL-PURPOSE INDEX combines and
weights a heterogeneous group of series to
arrive at an overall index showing the
change in business activity from the base
period to the present.
EXAMPLE: The federal government puts out
an index of leading economic indicators
The Customer Price Index
The Producer Price Index
etc
Consumer Price Index
Uses of the CPI:
It is an economic indicator of the rate of
inflation.
It allows consumers to determine the effect of
price increases on their purchasing power.
It computes real income (deflated income), CPI
is the deflator
It compute deflating sales
Formula :

100
1
x
W
xW
P
P
CPI
n
n

|
|
.
|

\
|
=

Consumer Price Index
Purchasing Power


Real Income


Deflating Sales
100


x
index e approximat An
sales Actual
sales Deflated =
100
1 $
sin x
CPI
dollar of power g Purcha =
100 Re x
CPI
e Moneyincom
alIncome=
Example
Year Money Income CPI Real Income
2000 260 120 216.7
2001 300 130 230.8
2002 330 143 230.8
2003 350 175 200.0
2004 420 180 233.3
Shifting The Base Period
When two or more series of index
numbers are to be compared, it is
necessary they do not have the same
base period.
First select a common base period for all
series. Then use the respective base
numbers as the denominators and
convert each series to the new base
period.
Example
Food & Beverages Housing
(2000=100) (2002=100)
2000 100 95
2001 102.7 98
2002 108.1 100
2003 112.6 105
2004 115.2 107
Food & Beverages Housing
2000 100 100
2001 102.7 103.2
2002 108.1 105.3
2003 112.6 110.5
2004 115.2 112.6
Index
Year
Year
Index (2000=100)