A Practical Introduction to Index Numbers Chapter 1: Introduction

What is an index number? It is a measure of change Consider this value of retail sales data for GB between 2005 and 2008 (source: ONS) Represent retail sales in two ways: as values and as scaled values Year Value of Retail Sales (£bn) Value relative to sales in 2005 (2005=100) 2005 64.276 100.00 2006 67.171 104.50 2007 69.668 108.61 2008 72.668 113.06 Ralph, O'Neill & Winton

What is an index number? Use a scaled value representation to make change more clearly seen Set the scaled series to be around 100 for clarity The scaled values are called index numbers Ralph, O'Neill & Winton

What is an index number? Index numbers simplify comparison; it is easy to see that the % change between 2007 and 2005 is 8.61% Scaling the values does not alter the % change An index number representation is useful when the level of a data series is not as important as the degree of change Ralph, O'Neill & Winton

Example – Consumer Prices Index This tracks the movement in the general level of consumer prices This extract is from the statistical bulletin for September 2013 Year Month Index UK (2005=100) 1 month rate 12 month rate 2013 May 126.1 0.2 2.7 June 125.9 -0.2 2.9 July 125.8 0.0 2.8 August 126.4 0.4 Ralph, O'Neill & Winton

Example – Consumer Prices Index Notice the tables shows index numbers for the level of prices It also shows change – the 1 month and 12 month rates of change The 12-month change figures is known as “inflation” Ralph, O'Neill & Winton

Example – Consumer Prices Index This table shows index numbers for all items in the represented in the index We are also interested in index numbers for specific types of goods The prices of different types of goods move differently Ralph, O'Neill & Winton

Example – Consumer Prices Index UK Consumer Prices Index and selected sectors, September 2011 to September 2013 Ralph, O'Neill & Winton

Index Number Definition “The fundamental purpose of an index number is that it shall fairly represent, so far as one figure can, the general trend of the many diverging ratios of which it is composed” (Fisher 1922) Ralph, O'Neill & Winton

Wider uses of index numbers Not just used in the economic sphere Used in many other fields Multidimensional poverty index Gender inequality index These indices are examples of “composite indicators” Widely used as measures to simplify complex data Ralph, O'Neill & Winton