1. A Practical Introduction to Index Numbers
Chapter 1: Introduction

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

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

9. 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

10. 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