Index Numbers

Question 1

Index Number

Answer 1

A standardised way of measuring changes in price/output etc over different periods

Question 2

Price Index

Answer 2

A standardised way of measuring changes in price - the monetary value

Question 3

Quantity/Volume Index

Answer 3

A standardised way of measuring changes in non monetary items

Question 4

Index Number Formula

Answer 4

Value of given year
Index number = —————————— x 100
Vale of base year

Question 5

Single Product Index

Answer 5

We use single product index when comparing the growth of individual products over time

Question 6

Calculating the Difference Between Years Using a Price Index

Answer 6

Step 1: find the numbers
Step 2: subtract the earlier year number from the later year number
Step 3: divide the remainder by the start point (times be 100 for %)

Question 7

Selecting a Base Year

Answer 7

Should be selected when as far as prices are concerned, nothing unusual happens
Should be fairly recent (up to 10 years ago)

Question 8

Weighted Index

Answer 8

Calculates the price index for multiple products at once by adding a weighting factor to each product depending on its importance

Question 9

Weighted Average Price Index

Answer 9

P1 Q1
ΣW x —— ΣW x ——
P0 or Q0
—————- —————-
ΣW ΣW

W = the weighting
P1/Q1 = the year we're comparing
P0/Q0 = The base year

Question 10

Weighting Factor

Answer 10

Determined by the relevant importance of each item e.g. the average annual purchases

Question 11

Calculating a Weighted Price Index

Answer 11

Step 1: calculate the price relatives for each term (divide that year by the base year)
Step 2: add a weighting factor
Step 3: calculate relative weight by multiplying price relative by the weighting
Step 4: calculate the sum of the weighting and the sum of relative weights
Step 5: enter these into the weighted average price index formula

Question 12

Current Weighting Pros and Cons

Answer 12

Pros:
It’s the most up to date
It removes the effect of goods which may be subject to high price rises

Cons:
Once a base weighting is established future results can easily be compared and conclusions drawn
May prove easier cheaper and quicker to use base weightings if co’s don’t have current year data for quantities available
Using base weighting for many years allows for easy comparison

Question 13

Index Splicing

Answer 13

Simple process of recalculating each index figure using the value of the new base

Question 14

Index Splicing Formula

Answer 14

Old index of considered year
—————————————— x 100
Old index of new base year

Question 15

Average Quantity Index

Answer 15

ΣW Q1
———- x 100
ΣW Q0

W = the weighting 
Q1 = the year we are comparing
Q0 = the base year

Question 16

Relative Quantity Index

Answer 16

Σ [W x (Q1/Q0)]
———————- x 100
ΣW

W = the weighting 
Q1 = the year we are comparing
Q0 = the base year

Question 17

Calculating a Relative Quantity Index

Answer 17

Step 1: Calculate each section of the relative quantity index formula using a table
Step 2: enter figures into the relative quantity index forumla

Question 18

Retail Price Index

Answer 18

An index based on the average prices of a typical basket of goods, including the direct and indirect costs of housing

Question 19

Consumer Price Index

Answer 19

An index based on the average prices of a typical baskets of goods, excluding the cost of housing

Question 20

Calculating the Real Terms

Answer 20

Companies may use indices to adjust for inflation, by effectively deflating prices by inflation to see the real change in trading income

Question 21

Calculating the Real Terms

Answer 21

Step 1: rebase the index figures to the same year

Step 2: express the wage index in real terms (wages index divided by inflation index and x 100)