CH23:Index Numbers Flashcards
Why are index numbers (or indices) useful?
They show the market as a whole value (i.e. the overall performance of the market, if its growing/declining)
e.g. FT100
Definition of an index number?
i) Index numbers are special kinds of averages that are measured over a certain period.
ii) A standardised way of measuring changes in prices/output etc over different periods and comparing them to a certain standard/base number
What are the two main types of index numbers?
1)Price index - measures the change in monetary value
and
2)Quantity/Volume index - measures the change in non-monetary value
What is the formula for index numbers?
Index numbers =
value of given year / value of base year x 100
what must be established when discussing index numbers?
A base year must be established. the base year usually equals 100/is represented by 100
What is a single product index used for?
to look at the price change of a single product between certain time periods
What are features of an appropriate base year?
A base year must be:
i) Fairly recent, no older than 10 years
ii) A normal year i.e. in terms of prices nothing unusual should be happening (such as high inflation)/the inflation is reasonable
What does the Weighted average price index calculate?
the price index for multiple products at once by adding a weighting factor to each product depending on importance
Formula: Weighted average price index?
Sum(WxP1/P0)/Sum W
W=the weighting
P1= The year we are comparing
P0= the base year
Formula: Weighted average quantity index?
Sum(WxQ1/Q0)/Sum W
W=the weighting
Q1= The year we are comparing
Q0= the base year
Definition: Weighting factor?
Determined by the relative importance of each item, e.g. the average annual purchases (the more an item has been purchased, the more important it becomes)
We need to determine if we use the base year or current weighting (in terms of weighted average prices or quantity) - what are pros and cons of using the current weighting?
Pros: its is the most up to date
Pros: It removes the effects of goods which may be subject to high price rises (e.g. cigarettes due to taxes on them), vs. using the base year which would emphasise this
Cons: once a base weighting process has been established future results can be easily compared/conclusions made but you are not really looking at trends if using the current year
Cons: cheaper/quicker to use a base year if companies don’t have current year data available
Cons: What is it being compared to? need to be LFL so using a base year for several years then changing to current weighting won’t provide a useful comparison.
What are price and quantity indexes useful for?
Comparing the growth of certain products and markets over time
Why do we use index splicing?
to make sure the base year remains appropriate (i.e. is not out of date or if the economy goes through a period of political/economic instability)
What is index splicing?
the process of recalculating each index figures using the value of the new base
