Page 143 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Index numbers

Price indices

2.1 Simple price indices

 For a single product

Price in any given year P 1
 Price Index = × 100 = × 100
Price in base year P 0

2.2 Relative price indices

 For a collection (“basket”) of products

∑[ ×( / )]

 Relative price Index = × 100
∑
 “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

137