Chapter 9
Index numbers
Outcome
By the end of this session you should be able to:
calculate indices for price inflation and national income growth using either base
or current weights and use indices to deflate a series
and answer questions relating to these areas.
The underpinning detail for this chapter in your Integrated Workbook can be
found in Chapter 9 of your Study Text
165
Chapter 9
Overview
Basics
INDEX NUMBERS
Price Indices Quantity indices
Inflation
166
Index numbers
Basics
1.1 Introduction
Index numbers measure how a group of related commercial quantities vary,
usually over time
1.2 Definition
Value in any given year
Index number = × 100
Value in base year
1.3 Interpretation
An index of 113 means there has been an increase of 13% since the base year
An index of 85 means there has been a decrease of 15% since the base year
If an index goes up from 120 to 135, the % increase is (135/120) – 1 = 0.125 or
12.5%. You cannot just subtract the indices.
1.4 Choice of base year
Needs to be a typical year
May need changing if comparison is out of date
1.5 Changing base year
Old index number using original base year
New Index number = × 100
Old index number at new base year
This is also used when splicing chains of index numbers together
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Chapter 9
Question 1
By calculating the index numbers, you are demonstrating the maths skill
of working out percentages of amounts and expressing one amount as a
percentage of another.
Basic index calculation
Express the following data with 2012 as the base year.
Year 2012 2013 2014 2015 2016
Value 153 168 177 181 184
2012 = 153/153 × 100 = 100
2013 = 168/153 × 100 = 109.8
2014 = 177/153 × 100 = 115.7
2015 = 181/153 × 100 = 118.3
2016 = 184/153 × 100 = 120.3
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Index numbers
Question 2
Changing base year
An index has been created with the following values, expressed with a base
year of 2012.
Year 2012 2013 2014 2015 2016
Value 100 109.8 115.7 118.3 120.3
Amend the index figures so that the base year is 2015.
2012 = 100/118.3 × 100 = 84.5
2013 = 109.8/118.3 × 100 = 92.8
2014 = 115.7/118.3 × 100 = 97.8
2015 = 118.3/118.3 × 100 = 100
2016 = 120.3/118.3 × 100 = 101.7
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Chapter 9
Question 3
By combining the series of index numbers, you are demonstrating the
maths skill of working out percentages of amounts and expressing one
amount as a percentage of another.
Combining series
Two indices have been created for the same values. The first has a base year
of 2010 and the second has a base year of 2013. Combine both series with a
base year of 2013.
Series 1:
Year 2010 2011 2012 2013
Value 100 105 109 115
Series 2:
Year 2014 2015 2016 2017
Value 106 110 113 117
The series 2 figures already have a base year of 2013 so do not need
amending. The calculations for the series 1 figures are:
2010 = 100/115 × 100 = 87.0
2011 = 105/115 × 100 = 91.3
2012 = 109/115 × 100 = 94.8
2013 = 115/115 × 100 = 100
Illustrations and further practice
Now read illustrations 1 to 4 and try TYUs 1 to 5 from Chapter 9
170
Index numbers
Price indices
2.1 Simple price indices
For a single product
Price in any given year P
Price index = × 100 = 1 × 100
Price in base year P0
2.2 Relative price indices
For a collection (“basket”) of products
∑ [w×(P
Relative price index = 1 /P0 )] ×100
∑w
“W”s are weights – e.g. typically quantities produced or consumed
Weights can be derived from quantities in the base year (“base weighted”) or
current year (“current weighted”)
2.3 Choice of weighting
Current Base
reflect shifts away from goods with does not do this and hence
high price rises exaggerates inflation.
current quantities can be very Simpler
difficult to obtain
More costly and time-consuming to Cheaper
calculate
Difficult to compare many years Index for each year can be
compared with every other
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Chapter 9
Question 4
Simple price index
Express a price of $99 in 2015 as an index with a base of 2012 when the price
was $80.
Price in any given year P1
Price index = × 100 = × 100
Price in base year P0
2015 index = $99/$80 × 100 = 123.75
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Index numbers
Question 5
By calculating the relative price index, you are developing the skill of
analysis.
Relative price index
A manager wishes to index the prices of four of its products between last year
as the base year and this year’s prices. The price and quantity information is as
follows:
Last year This year
Product Price Quantity Price Quantity
($) (units) ($) (units)
A $10.00 60 $10.60 63
B $8.00 175 $8.80 189
C $17.00 250 $19.55 255
D $25.00 1,000 $25.75 1,100
Calculate the base weighted price index using quantities as the weighting.
Step 1 – calculate the price relative (P1/P0) for each product:
Product P1/P0
A 1.06
B 1.10
C 1.15
D 1.03
Step 2 – determine the weightings and apply them to the price relatives:
Product P1/P0 Weighting P1/P0 ×
weighting
A 1.06 60 63.6
B 1.10 175 192.5
C 1.15 250 287.5
D 1.03 1,000 1,030.0
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Chapter 9
Step 3 – total the weightings and the P1/P0 × weightings columns and use the
relative price index formula to complete the calculation:
Product P1/P0 Weighting P1/P0 ×
weighting
A 1.06 60 63.6
B 1.10 175 192.5
C 1.15 250 287.5
D 1.03 1,000 1,030.0
1,485 1,573.60
∑ [w× (P1 /P0 )]
Relative price index = ×100
∑w
Index = 1,573.60 / 1,485 × 100 = 106.0
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Index numbers
Question 6
Relative price index
A manager wishes to index the prices of four of its products between last year
as the base year and this year’s prices. The price and quantity information is as
follows:
Last year This year
Product Price Quantity Price Quantity
($) (units) ($) (units)
A $10.00 60 $10.60 63
B $8.00 175 $8.80 189
C $17.00 250 $19.55 255
D $25.00 1,000 $25.75 1,100
Calculate the current weighted price index using values as the weighting.
Step 1 – calculate the price relative (P1/P0) for each product:
Product P1/P0
A 1.06
B 1.10
C 1.15
D 1.03
Step 2 – determine the weightings and apply them to the price relatives:
Product P1/P0 Weighting Weighting P1/P0 ×
calculation weighting
A 1.06 10.6 × 63 667.80 707.868
B 1.10 8.8 × 189 1,663.20 1,829.52
C 1.15 19.55 × 255 4,985.25 5,766.0375
D 1.03 25.75 × 1,100 28,325.00 29,174.75
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Chapter 9
Step 3 – total the weightings and the P1/P0 × weightings columns and use the
relative price index formula to complete the calculation:
Product P1/P0 Weighting Weighting P1/P0 ×
calculation weighting
A 1.06 10.6 × 63 667.80 707.868
B 1.10 8.8 × 189 1,663.20 1,829.52
C 1.15 19.55 × 255 4,985.25 5,733.0375
D 1.03 25.75 × 1,100 28,325.00 29,174.75
35,641.25 37,445.1755
∑ [w× (P1 /P0 )]
Relative price index = ×100
∑w
Index = 37,445.1755 / 35,641.25 × 100 = 105.1
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Index numbers
Quantity indices
3.1 Simple quantity indices
For a single product
Quantity in any given year Q
Quantity index = × 100 = 1 × 100
Quantity in base year Q0
3.2 Relative quantity indices
For a collection (“basket”) of products
∑ [w×(Q
Relative quantity index = 1 /Q0 )] × 100
∑w
“W”s are weights – e.g. typically prices of products
Weights can be derived from prices in the base year (“base weighted”) or
current year (“current weighted”)
3.3 Aggregate quantity indices
∑ w×Q
Aggregate quantity index = 1 × 100
∑ w×Q
0
Question 7
If the quantity of a product sold has risen from 1,200 units in 2012 to 1,400 units
in 2016, express the units sold in 2012 as an index with a base year of 2016.
Quantity in any given year Q1
Quantity index = × 100 = × 100
Quantity in base year Q0
2012 index = 1,200/1,400 × 100 = 85.7
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Chapter 9
Question 8
By calculating the relative price index, you are developing the skill of
analysis.
Relative quantity index
A manager wishes to index the quantities of four of their company’s products
between last year as the base year and this year’s quantities. The price and
quantity information is as follows:
Last year This year
Product Price Quantity Price Quantity
($) (units) ($) (units)
A $10.00 60 $10.60 63
B $8.00 175 $8.80 189
C $17.00 250 $19.55 255
D $25.00 1,000 $25.75 1,100
Calculate the current weighted quantity index using prices as the weighting.
Step 1 – calculate the quantity relative (Q1/Q0) for each product:
Product Q1/Q0
A 1.05
B 1.08
C 1.02
D 1.1
Step 2 – determine the weightings and apply them to the quantity relatives:
Product Q1/Q0 Weighting Q1/Q0 ×
weighting
A 1.05 $10.60 11.13
B 1.08 $8.80 9.504
C 1.02 $19.55 19.941
D 1.1 $25.75 28.325
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Index numbers
Step 3 – total the weightings and the Q1/Q0 × weightings columns and use the
relative quantity index formula to complete the calculation:
Product Q1/Q0 Weighting Q1/Q0 ×
weighting
A 1.05 $10.60 11.13
B 1.08 $8.80 9.504
C 1.02 $19.55 19.941
D 1.1 $25.75 28.325
$64.70 68.90
∑ [w× (Q1 /Q )]
Relative quantity index = ×100
∑w
Index = 68.90 / 64.70 × 100 = 106.5
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Chapter 9
Question 9
By calculating the relative price index, you are developing the skill of
analysis.
Aggregate quantity index
A manager wishes to index the quantities of four of their company’s products
between last year as the base year and this year’s quantities. The price and
quantity information is as follows:
Last year This year
Product Price Quantity Price Quantity
($) (units) ($) (units)
A $10.00 60 $10.60 63
B $8.00 175 $8.80 189
C $17.00 250 $19.55 255
D $25.00 1,000 $25.75 1,100
Calculate the aggregate quantity index using current year prices as the
weighting.
Step 1 – calculate values for w × Q1 and w × Q0 and total them:
Product w × Q1 w × Q0
A 667.80 636.0
B 1,663.20 1,540.0
C 4,985.25 4,887.5
D 28,325.00 25,750.0
35,641.25 32,813.50
Step 2 – use the aggregate index formula to complete the calculation:
∑ w× Q1
Aggregate quantity index = × 100
∑ w ×Q0
Index = $35,641.25/$32,813.50 × 100 = 108.6
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Index numbers
Illustrations and further practice
Now read illustration 5 and try TYUs 6 to 9 from Chapter 9
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Chapter 9
Inflation
4.1 Terminology
When describing cash flows it is important to clarify whether inflation is included
in the figures.
'Money’ cash flows include predicted inflation and other price rises
they are the actual cash flows that take place
e.g. If I am awarded a 3% pay rise, then my gross
salary will increase by 3% in money terms
‘Real’ cash flows have had general inflation taken out of them
If general inflation is 3% per annum, then a 3% pay
rise leaves me no better off in real terms
If inflation is only 2% then I am approximately 1%
better off in real terms
4.2 Switching between money and real rate indices
Real index = money index/inflation index
4.3 UK Inflation
RPI and CPI – both based on baskets of goods
Fixed quantity price indices
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Index numbers
Question 10
By calculating the relative price index, you are developing the skill of
analysis.
Inflation
The average salary of a group of manual factory workers has been tracked for a
number of years as follows, along with the consumer prices index (CPI) figures
for those periods:
Year Salary ($) CPI value
2012 9,000 110
2013 9,200 114
2014 9,350 117
2015 9,500 121
2016 9,700 126
Recalculate each year’s salary as though it were expressed in 2016 prices.
2012 $9,000 × 126/110 = $10,309
2013 $9,200 × 126/114 = $10,168
2014 $9,350 × 126/117 = $10,069
2015 $9,500 × 126/121 = $9,893
2016 $9,700
Salaries for these workers have not been keeping up with inflation
Illustrations and further practice
Now read illustration 6 and try TYUs 10 to 13 from Chapter 9
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Chapter 9
You should now be able to answers all the questions from chapter 9 of the
Study Text and questions 180 – 191 from the Exam Practice Kit.
For further reading, visit Chapter 9 from the Study Text.
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Index numbers
Answers
Question 1
2012 = 153/153 × 100 = 100
2013 = 168/153 × 100 = 109.8
2014 = 177/153 × 100 = 115.7
2015 = 181/153 × 100 = 118.3
2016 = 184/153 × 100 = 120.3
Question 2
2012 = 100/118.3 × 100 = 84.5
2013 = 109.8/118.3 × 100 = 92.8
2014 = 115.7/118.3 × 100 = 97.8
2015 = 118.3/118.3 × 100 = 100
2016 = 120.3/118.3 × 100 = 101.7
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Chapter 9
Question 3
The series 2 figures already have a base year of 2013 so do not need
amending. The calculations for the series 1 figures are:
2010 = 100/115 × 100 = 87.0
2011 = 105/115 × 100 = 91.3
2012 = 109/115 × 100 = 94.8
2013 = 115/115 × 100 = 100
Question 4
Price in any given year P1
Price index = × 100 = × 100
Price in base year P0
2015 index = $99/$80 × 100 = 123.75
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Index numbers
Question 5
Step 1 – calculate the price relative (P1/P0) for each product:
Product P1/P0
A 1.06
B 1.10
C 1.15
D 1.03
Step 2 – determine the weightings and apply them to the price relatives:
Product P1/P0 Weighting P1/P0 ×
weighting
A 1.06 60 63.6
B 1.10 175 192.5
C 1.15 250 287.5
D 1.03 1,000 1,030.0
Step 3 – total the weightings and the P1/P0 × weightings columns and use the
relative price index formula to complete the calculation:
Product P1/P0 Weighting P1/P0 ×
weighting
A 1.06 60 63.6
B 1.10 175 192.5
C 1.15 250 287.5
D 1.03 1,000 1,030.0
1,485 1,573.60
∑ [w× (P1 /P0 )]
Relative price index = ×100
∑w
Index = 1,573.60 / 1,485 × 100 = 106.0
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Chapter 9
Question 6
Step 1 – calculate the price relative (P1/P0) for each product:
Product P1/P0
A 1.06
B 1.10
C 1.15
D 1.03
Step 2 – determine the weightings and apply them to the price relatives:
Product P1/P0 Weighting Weighting P1/P0 ×
calculation weighting
A 1.06 10.6 × 63 667.80 707.868
B 1.10 8.8 × 189 1,663.20 1,829.52
C 1.15 19.55 × 255 4,985.25 5,766.0375
D 1.03 25.75 × 1,100 28,325.00 29,174.75
Step 3 – total the weightings and the P1/P0 × weightings columns and use the
relative price index formula to complete the calculation:
Product P1/P0 Weighting Weighting P1/P0 ×
calculation weighting
A 1.06 10.6 × 63 667.80 707.868
B 1.10 8.8 × 189 1,663.20 1,829.52
C 1.15 19.55 × 255 4,985.25 5,733.0375
D 1.03 25.75 × 1,100 28,325.00 29,174.75
35,641.25 37,445.1755
∑ [w× (P1 /P0 )]
Relative price index = ×100
∑w
Index = 37,445.1755 / 35,641.25 × 100 = 105.1
188
Index numbers
Question 7
Quantity in any given year Q1
Quantity index = × 100 = × 100
Quantity in base year Q0
2012 index = 1,200/1,400 × 100 = 85.7
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Chapter 9
Question 8
Step 1 – calculate the quantity relative (Q1/Q0) for each product:
Product Q1/Q0
A 1.05
B 1.08
C 1.02
D 1.1
Step 2 – determine the weightings and apply them to the quantity relatives:
Product Q1/Q0 Weighting Q1/Q0 ×
weighting
A 1.05 $10.60 11.13
B 1.08 $8.80 9.504
C 1.02 $19.55 19.941
D 1.1 $25.75 28.325
Step 3 – total the weightings and the Q1/Q0 × weightings columns and use the
relative quantity index formula to complete the calculation:
Product Q1/Q0 Weighting Q1/Q0 ×
weighting
A 1.05 $10.60 11.13
B 1.08 $8.80 9.504
C 1.02 $19.55 19.941
D 1.1 $25.75 28.325
$64.70 68.90
∑ [w× (Q1 /Q )]
Relative quantity index = ×100
∑w
Index = 68.90 / 64.70 × 100 = 106.5
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Index numbers
Question 9
Step 1 – calculate values for w × Q1 and w × Q0 and total them:
Product w × Q1 w × Q0
A 667.80 636.0
B 1,663.20 1,540.0
C 4,985.25 4,887.5
D 28,325.00 25,750.0
35,641.25 32,813.50
Step 2 – use the aggregate index formula to complete the calculation:
∑ w× Q1
Aggregate quantity index = × 100
∑ w ×Q0
Index = $35,641.25/$32,813.50 × 100 = 108.6
Question 10
2012 $9,000 × 126/110 = $10,309
2013 $9,200 × 126/114 = $10,168
2014 $9,350 × 126/117 = $10,069
2015 $9,500 × 126/121 = $9,893
2016 $9,700
Salaries for these workers have not been keeping up with inflation
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Chapter 9
192
