Uses of Index Numbers
Uses of Index Numbers
Courses Info
How are Index Numbers calculated and interpreted?
Index Numbers allow comparisons to be made between different years and measure the magnitude of change over time
A base year is used for comparison with other years and is therefore given the index number of 100
How do Index Numbers measure changes in the price level and changes in other economic variables?
When calculating CPI, it is important to consider the fact that different items in the basket have different weights.
This difference in weight depends upon how much of the consumer’s income is spent on purchasing that good / service
The Index Number reflects information regarding the changes in price over time
Calculation:
(Pn / P0) x 100
Pn = the price level in the year being compared
P0 = the price level in the base year
Weights are assigned using the formula:
P0 = original price of the unit
Q0 = quantity of the unit being compared
