How to calculate Index numbers and how to use them

1. Handling Economic Data – Index Numbers
EdExcel AS Economics 2.1.1

2. Basics of Index Numbers
1. Index numbers are a useful way
of expressing economic data
time series and comparing /
contrasting information
2. An index number is a figure
reflecting price or quantity
compared with a base value
3. The base value always has an
index number of 100
4. The index number is then
expressed as 100 times the ratio
to the base value
5. Note that index numbers have
no units e.g. £, Euros or $
• FTSE-100 Share Index
• Consumer Prices Index
(CPI)
• Exchange Rate Index
• Index of House Prices
• Index of Property Rents
• Index of GDP or GNI
• Human Development
Index (HDI)
• Index of Production in
Manufacturing
Examples

3. Calculating an Index Number
Year
Average UK
House Price (£s)
Index of UK
House Prices
(2007=100)
2007 192,651 100.0
2008 194,658 101.0
2009 159,961 82.2
2010 167,973 105.0
2011 162,915 97.0
2012 161,648 99.2
2013 163,593 101.2
Index number in Year Y = (Data Value in Year Y / Base Year Value)*100
The chosen base year
Large fall – housing slump
A recovery in house prices
but little higher than 2007

4. Index Numbers: UK Real Disposable Income Per Head
Data is for the 1st quarter of each year
• The table shows annual figures for
real disposable income per head
• Real disposable income measures
incomes adjusted for taxes and
benefits and also adjusted for the
effects of inflation
• The base year for the data is 2010
• The data shows that real disposable
income per head of population fell
in 2011 and 2012. This indicates a
decline in the standard of living
• Real Disposable Income per head
recovered in 2015 but remains
below the 2010 level.
Year
Real Disposable
Income Per Capita
2008 100.1
2009 97.8
2010 100.0
2011 98.5
2012 95.8
2013 97.1
2014 96.5
2015 98.4
Source: Office for National Statistics, July 2015

5. Index Numbers: Index of Gas Prices in the UK
81.7 87.5
100
131.3
141.3
168.7
191.4
180.8
200.4
221.4
238.4
249.7
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Consumerpriceindex
• The chart shows an index of consumer prices for gas in the UK from 2003 to 2014
• The base year for the consumer price index is 2005, i.e. the CPI in this year = 100
• Gas prices have risen strongly over recent years, the highest rate of inflation was in
2006 when the index of gas prices rose by 31.3%.
Source: Office for National Statistics, July 2015

6. CPI: How is the Rate of Inflation Calculated?
• Inflation in the UK is measured by the consumer prices index (CPI)
• A base year is selected and a family expenditure survey is carried
out – the survey covers over 40,000 households
• A representative basket of goods and services used and weights
are attached to each item - based on these items’ importance in
people’s expenditure as measured the family spending survey
• Each month government officials collect 120,000 separate price
quotations in 141 locations of around 600 products
• Weights are multiplied by price changes - the weighted price
changes are then totalled to calculate the inflation rate
At the start of each year the weights used to compile both the CPI
are updated using the latest information on household spending

7. Weights in the Consumer Prices Index (2013)
Brought into CPI in 2013
• White rum
• Continental meats
• E-readers
• Daily disposable contact
lenses
• Hot chocolate
Taken out of CPI in 2013
• Champagne
• Gas barbeques
• Pairs of soft contact lenses
• Round lettuces
The “shopping baskets‟ of items used in the
Consumer Prices Index (CPI) are reviewed
each year. Some items are taken out and
some are brought in to make sure the CPI is
up to date and more representative of
consumer spending patterns

8. Handling Economic Data – Index Numbers
EdExcel AS Economics 2.1.1