4.2.1.3 uses of index numbers

Question 1

what is an index number?

Answer 1

• frequently used to illustrate economic variables when data are presented

particularly useful when:
- comparisons are made over periods of times
- it’s the size of changes in variables that need to be highlighted

Question 2

what’s a base year?

Answer 2

• index numbers usually start with a value of 100
• known as the base year value
• in a base year, the original data is ‘equated’ to a value of 100
• change in the index number will show how far the variable has moved away from the base year value
• all countries have the same base year
  -> doesn’t mean the underlying raw data is the same in every country

Question 3

how do we calculate the index number?

Answer 3

new year / base year x 100

Question 4

what do you do when you don’t have the base year raw data?

Answer 4

(current year’s raw value / previous year’s raw value) x previous year’s index value

Question 5

what’s a weighted index?

Answer 5

• an ‘average’ index made up of a combination of other indices

Question 6

what’s the human development index?

Answer 6

• equally weighted between:
  an index number representing GNI per capita
  an index number representing life expectancy
  an index number representing number of years of schooling

Question 7

what’s a price index?

Answer 7

• unequally weighted between indices representing price changes of different types of goods/services
  where the weights are set according to the % of income spent on those goods/services

Question 8

how do you calculate the weighed price index?

Answer 8

1) multiply the weight by the price index for each category
2) add these figures together
3) divide by 1000 (because the weights are expressed as proportions of 1000)

Question 9

how do you calculate the % change in price index?

Answer 9

difference / original x 100