3. Measuring Macroeconomic Performance - Index Numbers

Question 1

What are index numbers?

Answer 1

An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. The index number is then expressed as 100 times the ratio to the base value.

Question 2

What do changes in index numbers represent?

Answer 2

Percentage increases in price/inflation (or whatever) push the index number above 100, and percentage decreases push the figure below 100. An index number of 102 means a 2% rise from the base year, and an index number of 98 means a 2% fall.

Question 3

How are index numbers calculated?

Answer 3

To calculate index numbers find the % change from the base year and add that to 100 (the base year value).E.g. 2011 (Base Year) Oil Prices are $80/barrel, in 2018 (new year of comparison) Oil Prices are only $50/barrel. The % decrease in price here is -37.5% - so 100 - 37.5 = 62.5 - the new index number for the year 2018.

Question 4

When are index numbers commonly used?

Answer 4

The obvious example of use of index numbers is to measure CPI inflation - each quarter is compared to the last - note: inflation is calculated using ‘the basket of goods’ and varied weightings for different items (see inflation cards)