BMS1024 MANAGERIAL STATISTICS

Index Numbers

BMS1024 MANAGERIAL STATISTICS

Index Numbers
Index numbers allow relative comparisons over

time Index numbers are reported relative to a base period index Base period index = 100 by definition

BMS1024 MANAGERIAL STATISTICS

Simple Price Index

Simple Price Index:

Pi Ii 100 Pbase
where Ii = index number for year i Pi = price for year i Pbase = price for the base year
BMS1024 MANAGERIAL STATISTICS

Index Numbers: Example

Airplane ticket prices from 1998 to 2006:
Index Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 Price 272 288 295 311 322 320 348 366 384
(base year = 2000)

92.2 97.6 100 105.4 109.2 108.5 118.0 124.1 130.2

I1998

P 272 1998 100 (100 ) 92 .2 P2000 295 P2000 295 100 (100 ) 100 P2000 295

I 2000

I 2006

P2006 384 100 (100 ) 130 .2 P2000 295

BMS1024 MANAGERIAL STATISTICS

Index Numbers: Interpretation

I1998 P 272 1998 100 (100 ) 92 .2 P2000 295
Prices in 1998 were 92.2% of

base year prices

Prices in 2000 were 100% of

I 2000

P 295 2000 100 (100 ) 100 P2000 295

base year prices (by definition, since 2000 is the base year)

I 2006

Prices in 2006 were 130.2% P2006 384 100 (100 ) 130 .2 of base year prices P2000 295
BMS1024 MANAGERIAL STATISTICS

Aggregate Price Indexes

An aggregate index is used to measure the rate of change from a base period for a group of items Aggregate Price Indexes Unweighted Aggregate Price Index Weighted Aggregate Price Index Paasche Index Laspeyres Index
BMS1024 MANAGERIAL STATISTICS

Unweighted Aggregate Price Index

Unweighted aggregate price index formula:

I
(t) U

Pi( t ) Pi( 0 )
i 1 i 1 n

100

i = item t = time period n = total number of items

( I Ut )

= unweighted price index at time t

(t ) i

P
i 1 n i 1

= sum of the prices for the group of items at time t

Pi ( 0 ) = sum of the prices for the group of items in time period 0

BMS1024 MANAGERIAL STATISTICS

Unweighted Aggregate Price Index: Example

Automobile Expenses: Monthly Amounts ($): Year 2003 2004 Lease payment 260 280 Fuel 45 60 Repair 40 40 Total 345 380 Index (2003=100) 100.0 110.1

2005
2006

305
310

55
50

45
50

405
410

117.4
118.8

I 2006

P P

2006

410 100 (100) 118.8 345 2003

Unweighted total expenses were 18.8% higher in 2006 than in 2003

BMS1024 MANAGERIAL STATISTICS

Weighted Aggregate Price Indexes

Laspeyres index Paasche index

LPI ( t )

Pi (t )Qi( 0 ) Pi ( 0 )Qi( 0 )
i 1 i 1 n

100

PPI ( t )

Pi ( t )Qi( t ) Pi ( 0 )Qi( t )
i 1 i 1 n

100

Q (i 0 ) = weights based on
period 0 quantities

Q (i t ) = weights based on current

period quantities

Pi( t ) = price in time period t

Pi( 0 ) = price in period 0

BMS1024 MANAGERIAL STATISTICS

Fishers Ideal Index

It is the geometric mean of the Laspeyres

and Paasche Indexes

Balances the negative effects of the

Laspeyres and Paasche Indexes

Formula:

Laspeyres IndexPaascheIndex

BMS1024 MANAGERIAL STATISTICS

Laspeyres & Paasche: Comparison

Laspeyres Price Index Advantage: Price indexes for all years can be compared Advantage: New quantities do not have to be determined for each year

Paasche Price Index Advantage: It incorporates current quantity figures

Disadvantage: New quantities have to be determined for each year

Disadvantage: It doesnt show the current consumption behavior

BMS1024 MANAGERIAL STATISTICS

Value Index
It reflects changes in both price and quantity
Both the price and quantity change from the

base period to the given period

Formula:

Q (i 0 ) = weights based on period 0 quantities

V (t )

P
i 1 n i 1

(t )

(t ) i

Q (i t ) = weights based on period t quantities

Pi ( 0 )Qi( 0 )

100

Pi( t ) = price in time period t

Pi( 0 ) = price in time period 0

BMS1024 MANAGERIAL STATISTICS

Common Price Indexes

Consumer Price Index (CPI)
Producer Price Index (PPI) Stock Market Indexes
Dow Jones Industrial Average S&P 500 Index NASDAQ Index

BMS1024 MANAGERIAL STATISTICS

Consumer Price Index (CPI): Wage Deflator

The most widely used Laspeyres Index. It reflects the changes in the prices of good and services commonly purchased in the marketplace. It is an economic indicator of the inflation rate.

It allows consumers to determine the effect of price increases on their purchasing power.
Wage deflator is the real wage/income after deflating the effect of

inflation.

Formula:

Nominal Wage R 100 CPI t

(t)
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Wage Deflator
Example: Compare the two set wages in 1995 and 1996

based on the 1990 Ringgit Malaysia (RM).

Year Nominal Wage CPI (1990 = 100) Deflated Wage (in 1990 RM)

1995

RM645.10

113.9

R
1996 RM664.30 118.7

(1995)

645.10 100 566.37 113.90

664.30 100 559.65 118.70

(1995)

R1995 = RM566.37 R1996 = RM559.65: indicates a decline in the real wage!

BMS1024 MANAGERIAL STATISTICS

At the end of this lesson, you should be able to:

Distinguish between aggregated and simple indexes
Apply and interpret Laspeyres or Paasche Indexes Compare and contrast between Laspeyres and

Paasche Indexes Apply and interpret Value Index Understand the usefulness of CPI Compute income/wage deflator using CPI

BMS1024 MANAGERIAL STATISTICS