AS Economics Unit 2 Using Index Numbers Index numbers are used as a measure of comparison for economic data such

as inflation and GDP. They are designed to measure the magnitude of economic changes over time. They work in a similar way to percentages. To use index numbers a base year is chosen and the index number 100 is given to the price of goods and services chosen. The following table provides an example: Commodity A B Year 1 Price 0.05 1.00 Index 100 100 100 Year 2 Price 0.10 0.80 Index 200 80 280 140

Commodity As year 1 price is 5p and is given the index number 100. By year 2 its price has doubled to 10p and as a result the index also doubles to 200. Commodity B falls in price from 1.00 to 80p and the index is revised downwards from 100 to 80. Adding the year 2 indexes gives a figure of 280. A simple average of the percentage change in price (280/2years) indicates that prices in year 2 are 40 per cent higher than they were in year 1 (140-100). Prices in following years would be expressed as a percentage of year 1 and averaged in a similar way. The problem with using index numbers is that they may not reflect the goods and services that consumers buy and the percentage of income spent by them on the product. To calculate the index number divide the year 2 price figure by the year 1 price figure and multiply by 100.

Task: Calculate the following index figures on the back of this sheet.

Commodity A B C D E F G H I J K L

Year 1 Price 0.05 1.00 2.00 26.00 12.00 1.23 4.51 0.72 18.00 19.75 100.99 0.50

Index

Year 2 Price 100 0.10 100 0.80 100 3.00 100 14.00 100 13.49 100 1.25 100 4.60 100 0.74 100 15.23 100 15.99 100 99.99 100 0.25 Total Average Price Change

Index

Question: For the 12 commodities how much on average have prices increased? (What is the rate of inflation?)

Task: Draw out your own table to show increase changes in index numbers for the RPI and CPI data below between the years/quarters of 2008 and 2009.