Index Numbers  Econ 105
Index Numbers <ul><li>Index numbers are used to summarize many variables or numbers with one number </li></ul><ul><li>The ...
Index Numbers  <ul><li>Index numbers may be computed for other things than prices </li></ul><ul><ul><li>quantity indexes <...
Price Indexes <ul><li>Price indexes are used to measure the general movement of prices (inflation) </li></ul><ul><li>Commo...
Price Relatives <ul><li>Price relatives are used to find the change in price  of a single item </li></ul>
Prices of different fruits in different years (NTL/kg)
Price Relatives for Banana and Kiwi <ul><li>From 2001 to 2002 </li></ul><ul><li>Banana:  PR B  =  (0.94/0.91)*100 = 103.3 ...
Banana price index  BASE YEAR=2000
Unweighted Price Indexes <ul><li>Price Relatives only represent the change in price of one item over time </li></ul><ul><l...
UnW Fruits Price Index  Base Year=2000
Problems with Unweighted Price Indexes <ul><li>Unweighted Price Indexes have a couple of problems: </li></ul><ul><ul><li>t...
Weighted Price Indexes <ul><li>If the price index is to be weighted by quantities, which quantities? </li></ul><ul><ul><li...
Laspeyres Index <ul><li>The Laspeyres index uses base year quantities as weights </li></ul>
Quantities purchased (1000 kg)
Laspeyres fruit price index (BY=2000)
Paasche Price Index <ul><li>The Paasche index uses current quantities as the weighting factor </li></ul>
Paashe fruit price index (BY=2000)
Which is Best? <ul><li>The advantage of the Laspeyres index is that once the quantities are set they do not change.  This ...
Weights – CPI (442 items)
Weights – PPI (762 items)
INFLATION IN TURKEY-CPI  Nov 2008
INFLATION IN TURKEY-PPI  Nov 2008
Deflating a Time Series <ul><li>Once computed, the indexes may be used to deflate a time series </li></ul><ul><li>Deflatin...
Upcoming SlideShare
Loading in …5
×

Lect8 Jan

817 views

Published on

index number ppt

Published in: Education
1 Comment
1 Like
Statistics
Notes
No Downloads
Views
Total views
817
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
24
Comments
1
Likes
1
Embeds 0
No embeds

No notes for slide

Lect8 Jan

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

×