2. INDEX NUMBERS

3. Definition of Index Number l A summary measure that states a relative comparison between groups of related items l Price Relative or Percentage Relative l A Number used to measure how much somthing has changed from one time period to another

4. Simple Price Relative Index An index which describes a single item or commodity in a given period versus the base period

5. Simple Price Index 100 n o. I P =

6. Example of Simple Price Index Suppose the price of one pound of a certain brand of coffee was $2.00 in 1990, $3.22 in 1995 and $6.04 in 1997. What are the price indicies of the three figures, with 1990 as the base (written, 1990 = 100)?

7. 1990 1995 1997 PRICE INDICES YEAR (1990 = 100) $2.00 $3.22 $6.04 $2.00 $3.22 $6.04 I p p  n o

8. Quantity Index Q n o

9. Value Index nn oo V

10. Unweighted Aggregate Price Index (Summarizes a groups of items or commodities) I P P    100 n o

11. Unweighted Aggregate Price Index: n o

12. 156.8171.2quart 442.2 459.1 Unweighted Aggregate Price Index: n o 101=134.16.

13. Dow Jones Industrial Average (DJIA) Where: P n = the price of stock n Divisor = the special DJIA divisor

14. Unweighted Average of Price Relatives Index I P P k    100 n o

15. n o

16. Weighted Aggregate Price Index l Takes prices and quantities (weights) into consideration l Laspeyres Index l Paasche Index l Fixed-Weight AggregatePrice Index

17. Laspeyres Index l Quantities are from the base period l Reflects changes in prices alone l Tends to overestimate price l Ignores changes in consumption l Easiest to calculate l Consumer Price Index-modified

18. Laspeyres Index no oo

19. Laspeyres Index= 96 90

20. Paasche Index l Quantities are from the given period l Reflects changes in production or consumption l Tend to underestimate price change l Weights have to be revised each time period l Can be costly and time consuming

21. Paasche Index nn on

22. Paasche Index= 96 90 I  30122 24024 1001254.

23. Fixed-Weight Aggregate Price Index l Weights are from one or more representative periods l Bureau of Labor Statistics revises weights every 10 years l Producer Price Index l Government agencies indicies are publishes in series (impractical to use Paasche)

24. Fixed-Weight Aggregate Price Index na a o

25. Weighted Arithmetic Mean of Price Relatives Index Where w = p a q a     w P P w I 100))(( n o

26. WEIGHTED ARITHMETIC MEAN OF RELATIVES INDEX

27. Standard and Poor’s (S&P) 500 Index Where: O.V. = original valuation in 1941- 43 N i = number of shares outstanding for Firm I P i = price of shares for Firm i

28. Consumer Price Index Fixed-weight aggregate price index (modified Laspeyres)

29. Consumer Price Index l Measures average changes in prices of a fixed “market basket”of goods and services usually bought by urban wage earners and clerical workers from one time period to another l Published monthly by Bureau of Labor Statistics l 400 goods and services

30. Uses of CPI l Economic Indicator l Escalator l Deflator for real wages n Process called deflating money wages n Price index - deflator n Deflated dollar value = constant dollar

31. Real Wages CPI 1987 = 100 Real Wages 98 = Current Wage 98 Consumer Price Index 98 X 100

32. Purchasing Power of Dollar $.82 = 1 122 X 100 $ = 1 CPI X 100 $0.18 decrease in purchasing power of $

33. % age Increase or Decrease Current Wage - Past Wage Past Wage X 100 30000 - 20000 20000 X 100 = 50%

34. Median Family Income CPI 1987=100 Real Income 1990 1998 $20,000 $30,000 105.5 130.5 $18,957.35 $22,988.51 50% increase 23.7% increase 21.3% increase

35. Median Family Income 1990 1998 $20,000 $30,000 50% increase CPI 1987=100 105.5 130.5 23.7% increase Real Income $20,000 $24,252.22 21.3% increase 100 123.7 Shift Base CPI 1990=100 23.7% increase