1. AS: 3.2.1 T HE MEASUREMENT OF MACROECONOMIC PERFORMANCE 2.1.3 Uses of index numbers The FTSE 100 index What does the information tell you?

2. 2.1.3 U SES OF INDEX NUMBERS  How index numbers are calculated and interpreted, including the base year and the use of weights  How index numbers are used to measure changes in the price level and changes in other economic variables

3.  Economists frequently use index numbers when making comparisons over time  An index starts on a given number e.g. year, the base number or base year, at an index number of 100. This is called the base period  In subsequent years, percentage increases may push the index number above 100 and percentage decreases push the figure below 100  An index number of 102 means a 2% rise from the base year, and an index number of 98 means a 2% fall from the base year I NDEX NUMBERS An index measures changes in a representative group of data. Indices are commonly used in Economics in order to analyse raw data. Common examples are the CPI, the RPI and the FTSE 100.

4.  Index numbers help to understand the significance of a change  They are easier to interpret than large numbers  Percentage change = change/original x 100  We always compare with a base number or year I NDEX NUMBERS YearPopulation of country x % changeIndex Number 1 (base year) 1 147 569 100 2 1 846 227 61161 3 2 213 904 93193

5. I NDEX NUMBERS Answer: Current price x 100 = Index number Base year price 2016: £17.00/£10.00 x 100 = 170; 2017: £15.00/£10.00 = 150 Year201520162017 Price of a good£10.00£17.00£15.00 Price index100 Question: Find the price index for 2016 and 2017 relative to 2015 Question: A firm spent £5400 on the good in 2015. How much would it have to spend in 2016? Answer: £5400 x 1.70 = £9180 Chain based: Question: What is the index number for 2017? Answer: £15.00/£17.00 x 100 = 88 However, chain base index numbers are based on the previous year. We can measure data against a base period.

6. We use weighting to show the relative importance of individual data in our findings e.g. we spend more on electricity than we do on crisps so this will be reflected in the CPI ‘basket of goods and services’. The table shows the costs of four raw materials that a company uses in the production process. It weights each raw material based on how much it is used and gives their price indices based on 2010. T HE USE OF WEIGHTS ProductABCD Weight10%20%30%40% Price index 2015 120150130140 10x120 = 120020x150=300030x130=390040x140=5600 Question: Calculate the weighted price index for raw materials in 2015 relative to 2010. Answer: 1200+3000+3900+5600 = 13700 = 137 100 Question: What is the percentage change in these raw material prices between 2010 and 2015? Answer: 37%

7. CPI Weights: 2001 to 2015 20012002200320042005200620072008 CPI (overall index)1000 01 Food and non-alcoholic beverages114115108106 102103109 02 Alcoholic beverages and tobacco48514746 444342 03 Clothing and footwear676162 63656263 04 Housing, water, electricity, gas and other fuels112107104103105108115 05 Furniture, household equipment and maintenance7869687565736867 06 Health2523 2224 22 07 Transport152140144151148155152 08 Communication2524252625 2423 09 Recreation and culture159 163150151147153152 10 Education1217201617 1819 11 Restaurants and hotels144137135137139134138137 12 Miscellaneous goods and services649710110611110610099 2009201020112012201320142015 CPI (overall index)1000 01 Food and non-alcoholic beverages118108118112106112110 02 Alcoholic beverages and tobacco444042 444543 03 Clothing and footwear57566265687270 04 Housing, water, electricity, gas and other fuels126129 144137129128 05 Furniture, household equipment and maintenance666461 596059 06 Health22 24 252425 07 Transport151164159162148152149 08 Communication23252627313231 09 Recreation and culture145150147134141144147 10 Education21191819212226 11 Restaurants and hotels128126120114117120121 12 Miscellaneous goods and services999794961038891 T HE USE OF WEIGHTS The ONS produce a list of categories of all types of products that go into the CPI ‘basket of goods and services. Look at the data and compare the significance of the changes to the UK inflation rate. Why do you think that these changes have taken place? Source: ONS

8. C HANGES IN THE C ONSUMER P RICE I NDEX Use base and chain base index numbers to answer these questions: 1.By how much did CPI change between 2005 and May 2015? 2.By how much did CPI change between May 2014 and May 2015? 3.What happened to CPI between December 2014 and January 2015? Can you provide any arguments as to why this occurred? The importance of CPI. Source: ONS CPI weights 2001-2015.

9. I NDEX NUMBERS Source: ONS 1.Using 2012 as a base year produce a table showing index numbers based on the above population figures. 2.Construct a weighted index using the figures for England, Wales, Scotland and Northern Ireland. 3.Identify two significant points of comparison between the changes shown in your index of population changes.