Chapter 17

Index Numbers

Learning Objectives

1. Know how to compute price relatives and understand how they represent price changes over time.

2. Know how to compute aggregate price indexes and understand how the choice of a base period
affects the index.

3. Become familiar with the Consumer Price Index, the Producer Price Index and the Dow Jones
averages.

4. Learn how to deflate a time series to measure changes over time in constant dollars.

5. Learn how to compute an aggregate quantity index and how to interpret it.

Solutions:

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Chapter 17

1. a.
Item Price Relative
A 103 = (7.75/7.50)(100)
B 238 = (1500/630)(100)

7.75  1500.00 1507.75

b. I 2009  (100)  (100)  237
7.50  630.00 637.50

7.75(1500)  1500.00(2) 14, 625.00

c. I 2009  (100)  (100)  117
7.50(1500)  630.00(2) 12,510.00

7.75(1800)  1500.00(1) 15, 450.00

d. I 2009  (100)  (100)  109
7.50(1800)  630.00(1) 14,130.00

2. a. From the price relative we see the percentage increase was 32%.

b. Divide the current cost by the price relative and multiply by 100.

$10.75
1992 cost = (100) = $8.14
132

3. a. Price Relatives A = (6.00 / 5.45)100 = 110

B = (5.95 / 5.60)100 = 106

C = (6.20 / 5.50)100 = 113

6.00  5.95  6.20

b. I 2009  (100)  110
5.45  5.60  5.50

6.00(150)  5.95(200)  6.20(120)

c. I 2009  (100)  109
5.45(150)  5.60(200)  5.50(120)

9% increase over the two year period.

20.15(35)  118.00(5)  8.80(60)

4. I 2009  (100)  114
17.50(35)  100.00(5)  8.00(60)

.19(500)  1.80(50)  4.20(100)  13.20(40)

5. I (100)  104
.15(500)  1.60(50)  4.50(100)  12.00(40)

Paasche index

6.

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 Index Numbers

Price Base Period Base Period Weighted Price

Item Relative Price Usage Weight Relatives
A 150 22.00 20 440 66,000
B 90 5.00 50 250 22,500
C 120 14.00 40 560 67,200
1250 155,700
155, 700
I  125
1250

7. a. Price Relatives A = (3.95 / 2.50) 100 = 158

B = (9.90 / 8.75) 100 = 113

C = (.95 /.99) 100 = 96

b.
Price Base Weight Weighted Price
Item Relatives Price Quantity Pi0Qi Relatives
A 158 2.50 25 62.5 9875
B 113 8.75 15 131.3 14837
C 96 .99 60 59.4 5702
253.2 30414
30414
I  120
253.2

Cost of raw materials is up 20% for the chemical.

8.
Price Base Weighted Price
Stock Relatives Price Quantity Weight Relatives
Holiday 110 15.50 500 7750 852500
NY Electric 109 18.50 200 3700 403300
KY Gas 97 26.75 500 13375 1297375
PQ Soaps 108 42.25 300 12675 1368900
37500 3922075

3922075
I  105
37500
Portfolio up 5%

9.
Price Base Weighted Price
Item Relatives Price Quantity Weight Relatives
Beer 115 17.50 35,000 612,500 70,437,500
Wine 118 100.00 5,000 500,000 59,000,000
Soft Drink 110 8.00 60,000 480,000 52,800,000
1,592,500 182,237,500
182, 237,500
I  114
1,592,500

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Chapter 17

$11.86
10. a. Deflated 1996 wages: (100)  $7.66
154.9

$18.55
Deflated 2009 wages: (100)  $8.74
212.2

18.55
b. (100)  156.4 The percentage increase in actual wages is 56.4%.
11.86

8.74
c. (100)  114.1 The change in real wages is an increase of 14.1%.
7.66

11. 2002 18.52 (100/179.9) = 10.29

2003 18.95 (100/184.0) = 10.30
2004 19.23 (100/188.9) = 10.18
2005 19.46 (100/195.3) = 9.96

9.96
 .97 the decrease in real wages and salaries from 2003 to 2005 is 3%.
10.30

12. a. 2005 4742 (100/195.3) = 2428

2006 5020 (100/201.6) = 2490
2007 5081 (100/207.3) = 2451

Manufacturers' shipments have increased slightly in constant dollars when deflated using the CPI.

b. 2005 4742 (100/155.8) = 3043

2006 5020 (100/160.3) = 3132
2007 5081 (100/166.6) = 3050

c. The PPI is a better deflator since manufacturing shipments reflect prices paid by manufacturers.

13.
Deflated
Year Retail Sales ($) CPI Retail Sales ($)
1982 380,000 96.5 393,782
1987 520,000 113.6 457,746
1992 700,000 140.3 498,931
1997 870,000 160.5 542,056
2002 940,000 179.9 522,513
2007 990,000 207.3 477,569

In terms of constant dollars, the firm's sales were increasing moderately until 1997, then they
decreased over the next two periods.

300(18.00)  400(4.90)  850(15.00) 20,110

14. I (100)  (100)  110
350(18.00)  220(4.90)  730(15.00) 18,328

95(1200)  75(1800)  50(2000)  70(1500)

15. I (100)  99
120(1200)  86(1800)  35(2000)  60(1500)

Quantities are down slightly.

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 Index Numbers

16.
Quantity Base Weighted Quantity
Model Relatives Quantity Price ($) Weight Relatives
Sedan 85 200 15,200 3,040,000 258,400,000
Sport 80 100 17,000 1,700,000 136,000,000
Wagon 80 75 16,800 1,260,000 100,800,000
6,000,000 495,200,000

495, 200, 000

I  83
6, 000, 000

17. a/b. Price Index

Year 2004 Base 2005 Base
2004 100.0 91.7
2005 109.0 100.0
2006 111.5 102.3
2007 112.2 102.9

18. a. Price Relatives A = (15.90 / 10.50) (100) = 151

B = (32.00 / 16.25) (100) = 197

C = (17.40 /12.20) (100) = 143

D = (35.50 / 20.00) (100) = 178

15.90(2000)  32.00(5000)  17.40(6500)  35.50(2500)

b. I (100)  170
10.50(2000)  16.25(5000)  12.20(6500)  20.00(2500)

15.90(4000)  32.00(3000)  17.40(7500)  35.50(3000)

19. I (100)  164
10.50(4000)  16.25(3000)  12.20(7500)  20.00(3000)

22.75(100)  49(150)  32(75)  6.5(50)

20. I Jan  (100)  73.5
31.50(100)  65(150)  40(75)  18(50)

22.50(100)  47.5(150)  29.5(75)  3.75(50)

I Mar  (100)  70.1
31.50(100)  65(150)  40(75)  18(50)

Market is down compared to 2007.

21. Price Relatives: Jan Mar

Oil (22.75 / 31.50) (100) = 72.2 71.4
Computer (49.00 / 65.00) (100) = 75.4 73.1
Steel (32.00 / 40.00) (100) = 80.0 73.8
Real Estate (6.50 / 18.00) (100) = 36.1 20.8

IJan = 73.5 IMar = 70.1

22.
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 Chapter 17

Base Weighted Price

Product Relatives Price Quantity Weight Relatives
Corn 173.9 2.30 1427 3282.1 570,757.19
Soybeans 197.8 5.51 350 1928.5 381,457.30
5210.6 952,214.49

952, 214.49
I  182.7
5210.6

23. a.
Fruit Price Relatives
Bananas (.53/.41) (100) = 129.3
Apples (1.12/.71) (100) = 157.7
Oranges (.91/.56) (100) = 162.5
Pears (1.27/.64) (100) = 198.4

b.
Weights (PioQio) Price Relative Product
9.963 129.3 1288.2
14.129 157.7 2228.1
7.784 162.5 1264.9
2.048 198.4 406.3
Totals 33.924 5187.5

5187.5
I  152.9
33.924

Fruit prices have increased by 52.9% over the 19-year period according to the index.

24. Salaries in constant (1982-84) dollars are computed as follows:

1970 $14,000 (100 / 38.8) = $36,082

1975 $17,500 (100 / 53.8) = $32,528
1980 $23,000 (100 / 82.4) = $27,913
1985 $37,000 (100 / 107.6) = $34,387
1990 $53,000 (100 / 130.7) = $40,551
1995 $65,000 (100 / 152.4) = $42,651
2000 $80,000 (100 / 172.2) = $46,458
2005 $110,000 (100 / 195.3) = $56,324

In constant dollar terms, real starting salaries have increased about 56% over this period.

25. The stock market prices in constant (1982-84) dollars are computed as follows:

2004 $51.00 (100 / 188.9) = $27.00

2005 $54.00 (100 / 195.3) = $27.65
2006 $58.00 (100 / 201.6) = $28.77
2007 $59.50 (100 / 207.3) = $28.70
2008 $59.00 (100 / 215.3) = $27.40

The value of the stock, in real dollars, is 1.48% higher in 2008 than it was in 2004. This is not a big
increase, but if the stock paid a high dividend it may still have been a good investment over this
period.

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 Index Numbers

1200(30)  500(20)  500(25)

26. I (100)  143
800(30)  600(20)  200(25)

Quantity is up 43%.

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