1.3 Uses of Index Numbers

Question 1

How are index numbers calculated and interpreted?

Answer 1

• Index numbers are used to make comparisons between years, and to measure the magnitude of change over time.
• A base year is used and is then compared to other years.
• For example, if the year 2015 is the base year, the value given to it is 100.
• If inflation has risen by 5% between 2015 and 2018, the index number for 2018 will be 105.

Question 2

How do index numbers measure changes in the price level and changes in
other economic variables?

Answer 2

• In the calculation of CPI, different items in the basket of goods have difference weights.

-Food will have a much larger weighting than clothing, since consumers spend more of their income on food.

• The index number measures the change in price over time.

Question 3

What is the index number calculation used?

Answer 3

• The calculation used is:
• (Pn/P0) x 100
• P0 is the price level in the base year
• Pn is the price in the year being compared.