2. LBSRE1021 Data Interpretation Lecture 1 Index Numbers

3. Objectives Calculate a Price Index (base or current weighted). Explain the use and meaning of these. Explain the calculation and use of the Retail price Index. Use a price index to deflate a series of figures.

4. Simple One Item Index

5. A note on ‘n’ The letter ‘n’ denotes the year in a series of years We use ‘0’ for the base year in the series The next year is year 1, then year 2 etc The example just shows base year and year one But we often deal with many years in a series p n is ‘price at year n where n=whatever year it is in the series’

6. Base year is 1995 (p 0 ) Price Index (year n)= p n / p 0 x 100 = 14/12 x 100 = 117 (%) Index is % but usually omitted Index for base year always 100. Quantity index calculated same way. How can quantity be taken into account?

7. More than one item

8. Individual Price Indices 19951996 Meat100290/250x100= 116.0 Bread10024/20x100= 120.0 Beans10039/37x100= 105.4

9. Aggregate Price Index Aggregate Price Index = Total cost at current prices/Total cost at base year prices BUT What quantities to use? Base year quantities (Laspeyres’ Index) Current year quantities (Paasche’s Index)

10. Base Weighting (Laspeyres’) Laspeyres’ Price Index= Total cost of base year quantities at current price/ Total cost of base year quantities at base year price= Σp n q 0 x 100 Σp 0 q 0

11. Current Weighting (Paasche’s) Paasche’s Price Index= Total cost of current year quantities at current price/ Total cost of current year quantities at base year price= Σp n q n x 100 Σp 0 q n

12. Compare Laspeyres’ & Paasche’s Laspeyres’ Easier to calculate Direct year to year comparison Most commonly used Base re-defined at intervals Paasche’s Reflects current consumption

13. Example (using data above)

14. Calculations Laspeyres’ Σp n q 0 x 100 Σp 0 q 0 =26080/22800 x 100 =114.3 Paasche’s Σp n q n x 100 Σp 0 q n =26660/23280 x 100 =114.5

15. Retail Price Index (RPI) Change in Price of ‘Basket of Goods’ 600 items in 11 groups Weights based on Family Expenditure Survey Base weighted index Base year change decided by Government Used to calculate REAL change in e.g. earnings or expenditure by deflating figures.

16. Deflated Figures Example (1)

17. Deflated Figures Example (2) Calculate real turnover based on 1988 RPI 89:8.2 x 106.9 = £7.6m 115.2 90:8.4 x 106.9 = £7.1m 126.1 91:8.8 x 106.9 = £7.0m 133.5 etc.

18. Deflated Figures Example (3)

19. Deflated Figures Example (4)

20. Index Numbers-Tasks Tutorial 1: –Calculation of Laspeyres’ and Paasche’s indices Tutorial 2: –Deflating using RPI Read: Presentation of Data chapter of Oakshott (and try exercises) Read: Web-page background notes Read: statistics.gov information Start part 1 of coursework.