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JOHN S. LOUCKS
St. Edwards University
Chapter 17
Index Numbers
Price Relatives
Aggregate Price Indexes
Computing an Aggregate Price Index
from Price Relatives
Some Important Price Indexes
Deflating a Series by Price Indexes
Price Indexes: Other Considerations
Quantity Indexes
Price Relatives
Price Relatives
Price Relatives
The prices Besco paid for newspaper and
television ads in 1992 and 1997 are shown
below. Using 1992 as the base year, compute
a 1997 price index for newspaper and
television ad prices.
1992
1997
Newspaper
$14,794 $29,412
Television
11,469 23,904
Price Relatives
Newspaper
I1997
29,412
(100) 199
14,794
Television
I1997
23,904
(100) 208
11,469
Unit Price
($/BTU)
Sector
1985
2000
1985
2000
Residential
9,473
8,804 $2.12
$10.92
Commercial 5,416
6,015
1.97 11.32
Industrial 21,287 17,832
.79 5.13
10
(100)
= 466
11
12
15
16
8,446 156.9
160.5
163.0
10,724 166.6
172.6
17
Selection of Items
When the class of items is very large, a
representative group (usually not a random
sample) must be used.
The group of items in the aggregate index
must be periodically reviewed and revised if
it is not representative of the class of items
in mind.
Selection of a Base Period
As a rule, the base period should not be too
far from the current period.
The base period for most indexes is
adjusted periodically to a more recent
period of time.
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Quality Changes
A basic assumption of price indexes is that
the prices are identified for the same items
each period.
Is a product that has undergone a major
quality change the same product it was?
A substantial quality improvement also may
cause an increase in the price of a product.
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Quantity Indexes
21
End of Chapter 17
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