Uses of index numbers

Question 1

How are index numbers calculated and interpreted?

Answer 1

Index numbers compare different years to a base year, which is assigned a value of 100. Changes over time, such as inflation, are reflected in the index number. For example, if the base year is 2015 (index = 100) and inflation rises by 5% between 2015 and 2018, the index number for 2018 will be 105.

Question 2

How do index numbers measure changes in the price level and other economic variables?

Answer 2

In CPI calculations, items in the basket of goods have different weights based on consumer spending (e.g., food has a higher weight than clothing). The index number measures the price change over time using the formula:
(Pn/P0)×100
Where P0 is the price in the base year and Pn is the price in the year being compared.