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Chapter
Eighteen
Chapter Eighteen
Index Numbers
GOALS
When you have completed this chapter, you
will be able to:
ONE
Describe the term index.
TWO
Understand the difference between a weighted price index and
an unweighted price index.
THREE
Construct and interpret a Laspeyres Price index.
FOUR
Construct and interpret a Paasche Price index. Goals
18- 3
Index Numbers
GOALS
When you have completed this chapter, you
will be able to:
FIVE
Construct and interpret a Value Index.
SIX
Explain how the Consumer Price index is constructed and
interpreted.
Goals
18- 4
An Index Number
expresses the relative
change in price,
quantity, or value
compared to a base
period.
Provide convenient
Facilitate ways to express the
comparison of change in the total
unlike series of a heterogeneous
group of items CPI
Bread $0.89
Car $18,000
Dress $200
Surgery $400,000
Why Convert Data to Indexes?
18- 7
Indexes: Four classifications
Quantity
Price Measures the changes in
quantity consumed from
Measures the changes
the base period to
in prices from a
another period.
selected base period
to another period. Special purpose
Combines and weights a
Value heterogeneous group of series
Measures the change in the to arrive at an overall index
value of one or more items showing the change in
from the base period to the business activity from the
given period (PxQ). base period to the present.
Types of Index Numbers
18- 8
Quantity
Federal Reserve
Quantity Output
Value
Special purpose
pt qt
P (100)
p0qt
where
qt is the current quantity consumed
p0 is the price in the base period
pt is the current price.
Construction of Index Numbers
18- 13
Fishers Ideal Index
Fishers ideal index = (Laspeyres index)(Paasches index)
Value Index
pt qt
V (100)
p0q0
Value Index
18- 15
Deflating Sales
Actual sales
Deflated sales (100)
An approximate index
Mr. Wagner
owns stock in
three companies.
Shown below is
the price per
share at the end
of 1997 and Laspeyres Weighted Price Index, P
2002 for the p t q 0
three stocks and P (100)
p 0 q 0
the quantities he $2(30) $4(15) $6(40)
owned in 1997 (100)
$1(30) $5(15) $6(40)
and 2002. $360
(100) 104.35
$345
18- 20
Paasche Weighted Price Index, P
p t q t
P (100)
p 0 q t
$2(50) $4(30) $6(20)
(100)
$1(50) $5(30) $6(20) Value Index
$340 p t q t
(100) 106.25 P (100)
$320 p 0 q 0
$2(50) $4(30) $6(20)
Fishers Ideal Index (100)
$1(30) $5(15) $6(40)
F = (104.35)(106.25)
$340
$345
(100) 98.55
=105.3
Example 1 continued