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Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
Lect8 Jan
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Lect8 Jan

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  • 1. Index Numbers Econ 105
  • 2. Index Numbers
    • Index numbers are used to summarize many variables or numbers with one number
    • The most common index numbers are price indexes
      • Consumer Price Index (CPI – TÜFE)
      • Producer Price Index (PPI – ÜFE)
      • ISE Index
      • Dow Jones Industrial Average
  • 3. Index Numbers
    • Index numbers may be computed for other things than prices
      • quantity indexes
      • quality indexes
  • 4. Price Indexes
    • Price indexes are used to measure the general movement of prices (inflation)
    • Common types of indexes
      • price relatives
      • unweighted
      • Laspeyres
      • Paasche
  • 5. Price Relatives
    • Price relatives are used to find the change in price of a single item
  • 6. Prices of different fruits in different years (NTL/kg)
  • 7. Price Relatives for Banana and Kiwi
    • From 2001 to 2002
    • Banana: PR B = (0.94/0.91)*100 = 103.3
    • Kiwi: PR K = (2.10/1.90)*100 = 110.5
    • OR
  • 8. Banana price index BASE YEAR=2000
  • 9. Unweighted Price Indexes
    • Price Relatives only represent the change in price of one item over time
    • Unweighted Price indexes are formed by adding the prices in the year of interest and dividing by the sum of the prices in the base year
  • 10. UnW Fruits Price Index Base Year=2000
  • 11. Problems with Unweighted Price Indexes
    • Unweighted Price Indexes have a couple of problems:
      • they may be influenced by items with high prices
      • items that are relatively unimportant in the goods bundle may have undue influence
    • The usual solution is to weight the prices by some quantities
  • 12. Weighted Price Indexes
    • If the price index is to be weighted by quantities, which quantities?
      • base year quantities (Laspeyres)
      • current year quantities (Paasche)
    • Most of the CPI’s and PPI’s use these or some variations (i.e. Fisher’s ideal PI)
  • 13. Laspeyres Index
    • The Laspeyres index uses base year quantities as weights
  • 14. Quantities purchased (1000 kg)
  • 15. Laspeyres fruit price index (BY=2000)
  • 16. Paasche Price Index
    • The Paasche index uses current quantities as the weighting factor
  • 17. Paashe fruit price index (BY=2000)
  • 18. Which is Best?
    • The advantage of the Laspeyres index is that once the quantities are set they do not change. This index is easy to update.
    • The advantage of the Paasche is that the quantities reflect the current production/consumption. However, it is difficult to update and may not be as easy to compare over time.
  • 19. Weights – CPI (442 items)
  • 20. Weights – PPI (762 items)
  • 21. INFLATION IN TURKEY-CPI Nov 2008
  • 22. INFLATION IN TURKEY-PPI Nov 2008
  • 23. Deflating a Time Series
    • Once computed, the indexes may be used to deflate a time series
    • Deflating a time series is done to remove the effect of price changes so that “real” changes may be evaluated
    • To deflate divide by the price index
    • Deflating puts the variable into units of base year prices

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