These questions and answers will help you understand how index numbers are created.
Economic indicators such as the price index ‘The Consumer Price Index’ or CPI are used in business to illustrate how the vale of items is changing over time due to rising prices.
Learn about their meaning and construction.
What is an index number?
Index numbers can be used to reflect the change in ‘time series’ data.
Using index numbers is a statistical way to measure the value of data at a particular point in time.
The base period for an index is usually set at 100 and subsequent time series data will increase or decrease at each point in time.
Here is an example of different data being compared by expressing as an index. This can clearly show changes in the data.
How do you construct an index?
The following is an example of an index showing how wages have grown over time.
This is an index of some average hourly wage index with base year 1950 (using made up numbers).
The base year of an index is 100.
What is the index base?
How do you choose the index base?
Remember the base year is 100, and may be reset when the index has grown and it is hard to measure the changes.
How do you measure changes between index numbers?
Using the previous index tables we can find the percentage change between 1980 and 1970 using the old and new index numbers
(When the base year is set at 100 it is a much easier calculation to determine percentage changes so from time to time rebasing the index numbers to 100 helps interpret the numbers). This is why the idea will get rebased from time to time.
What is an example of a price index?
The Consumer Price Index
The Consumer Price Index is constructed by the Australian Bureau of Statistics or ABS.
It measures the rate of price change for consumers.
The ABS monthly surveys prices of articles that a working metropolitan consumer would buy. So theoretically the CPI only indicates price movements to people who live in the city.
It is the most used measure of inflation for the media and government. Because of this it is the measure of inflation that the public is exposed to.
The CPI is like a variation of a Laspayres index, which takes into account prices and quantities.
The weighting is compiled using base period expenditure weights. This is determined in the Australian Bureau of Statistics 5 yearly Household Expenditure Survey.
The CPI basket of goods and services is constructed specifically to reflect the expenditure patterns of wage and salary earner households in each of the eight capital cities. Because of this, these households are referred to as “the CPI population group”.
There are 11 groups of expenditure items as listed in a summary of movements in the CPI index.
Australian Bureau of Statistics, 6401.0 – Consumer Price Index, Australia, Dec 2016
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0 accessed on 8 March 2017
To learn more about this, as a starting point, take this Macroeconomics – InflationTutorial Course Macroeconomics Inflation Tutorial Course