Index numbers are a means of providing the average change in a series of related variables over a given time period.
e.g. the Consumer Price Index (CPI) now gives the average change in prices (i.e. inflation rate) on a monthly basis.
Two main types of indices - price and quantity (though we can also have value indices)
- examples of price indices; consumer price index, share price index, household index etc.
- examples of quantity indices; quarterly industrial output, housing starts, export output etc.
All indices measured against a base of 100. Thus if we fix the base year for the CPI in 2002 at 100 and prices rise by 4% in 2003 the new index no. (for 2003) will be 104.
Simple indices are unweighted. However more realistic indices are weighted. For example in constructing the CPI, the amount spent on each item is taken into consideration).
e.g. for simplicity imagine that there is only two items to be considered bread and tea and people on average spend twice as much on tea (than bread) then the change in tea prices will be given a weighting of 2 (i.e. X 2), and bread a weighting of 1 (X 1)
Laspeyres and Paasche Indices
- Laspeyres always relate to weightings by base year
- Paashce relate to weightings by current year
We can also have two ways of compiling indices
e.g. with prices we can have
a) an aggregate price index
b) a price relatives index