Index Numbers

Question 1

Constructing a Simple Price Index

Answer 1

Formula = (P1 / P0)*100
P1 	= price in current period
P0 	= price in base period

Question 2

Laspeyres Price Index (LPI)

- Advantages & Disadvantages

Answer 2

Advantages:
Requires quantity data from only the base period.
The changes in the index can be attributed to changes in price.

Disadvantages:
It assumes that the base-period quantities are still realistic in the given period.
Does not reflect changes in buying patterns over time.
It may overweight goods whose prices increase.

Question 3

Paasche Price Index (PPI)

- Advantages & Disadvantages

Answer 3

Advantages:
Because it uses quantities from the current period, it reflects current buying habits.

Disadvantages:
It requires quantity data for the current year.
It tends to overweight the goods whose prices have declined.
It requires the prices to be recomputed each year.

Question 4

Splicing indices

Answer 4

To link the series we find the common year (e.g. 1975)
We then splice the index numbers into a single series using 1975 as the base year.
When we are splicing two indexes together we generally use the most up to date data as the base period.

Newer Index/ Older Index

Question 5

Real & Nominal GDP relationship with PI

Answer 5

Real GDP = (Nominal GDP/Price Index)*100

Question 6

CPI:

Population Coverage
Geographic Coverage
Item Coverage
Price Collection

Answer 6

Population Coverage
Population Coverage: All private and institutional households in the State and the expenditure of foreign tourists within Ireland.

It does not include the expenditure of other non private households.

Expenditure which occurs abroad by Irish residents is also excluded.

In statistical terms coverage is referred to as the domestic concept

Geographic Coverage
“Geographic Coverage: Covers the whole of the Republic of Ireland.

Pricing takes place in 84 locations (cities and towns) throughout the country.

Item Coverage
“All goods and services bought by the reference population for the purposes of consumption are included in the index.

Expenditure on capital assets and investments, gambling and certain other activities are however excluded.

Price Collection
“Personal visits are made to retail outlets by some 80 price collectors on a monthly basis.

Approximately 48,000 price quotations are gathered in this way. In addition, 137 special inquiries covering items such as utility charges and services are conducted by post, telephone and e-mail in conjunction with internet price collection.

The CSO supplies general specifications to price collectors and price collectors are free initially to select a brand and in certain cases, size.

Once selected, the same item/brand is priced on a monthly basis in order to ensure matched price quotations. If an item disappears, substitution can occur but that price is excluded until matched prices are available for the same comparable item for two consecutive months”