Statistics

Lecture 13

2021
time series analysis

Index Number
a number that measures the relative (percentage) change
(describe by how many percent the level of the phenomenon has increased/ decreased):

• in the level of a phenomenon - change in price, quantity, value or some other item of interest

• over a period of time

Importance of Index Numbers

USEFUL IN MANY OTHER AREAS OF BUSINESS AND ECONOMICS - consumer price index (CPI)
- Dow Jones
- Stock Exchange (NYSE) Index
HELPFUL IN PREDICTIONS

HELPFUL IN COMPARISONS - comparative study of the changes

time series analysis

index numbers
• Index numbers must always be related to some time period - base time period
• Current period = the period for which you wish to find the index numer (denoted by 1 or t)
• Base period = the period with which you wish to compare prices in the current period (denoted by 0)
• The choice of the base period should be considered very carefully - often depends on economic factors
• It should be a ‘normal’ period with respect to the relevant index
• It should not be chosen too far in the past
• Base period index = 100% (or 1) by definition

• There are 2 distinct ways in which Index numbers can be calculated

• Fixed base relatives: each Index is calculated based on the same fixed time point
• Chain base relatives: each Index is calculated with respect to the immediately preceding time point

• Simple index numer - measures the percentage change in one or more than one variable
• Composite index numer - measures the percentage change of a group of items (not one item)
- index number obtained by combining the information from a set of economic commodities
time series analysis

Simple index numer - measures the relative change in one variable / a single distinct commodity

• Fixed base relatives: each Index is calculated based on the same

yt
I y = 100 •
fixed time point
Chain base relatives: each Index is calculated with respect to
y0 the immediately preceding time point

Index
Number of Chain Index
where (base year =
Year Orders number
2018)
Iy = index number of commodity ‘y’ 2013 272 272/320=0.85 -
yt = value of commodity ‘y’ at time t 2014 288 288/320=0.90 1.06

y0 = value of commodity ‘y’ in the base period 2015 295 0.92 1.02
2016 311 0.97 1.05
2017 322 1.01 1.04
2018 320 1.00 0.99
2019 348 1.09 1.09
2020 366 1.14 1.05
2021 384 1.20 1.05
time series analysis

Simple index numer

changes of indexes
1. converting the Fixed Base Index Number to Chain Base Index Number
2. changing the base of fixed base index number
3. converting the Chain Base Index Number to Fixed Base Index Number
time series analysis

Simple index numer

changes of indexes
1. converting the Fixed Base Index Number to Chain Base Index Number

Viewers in cinemas in Poznań in 2010-2016

Indeksy Indeksy Indeksy

Viewers Fixed base Index Chain Index Fixed base Index
Year
Lata Widzowie
(in thous) jednopodstawowe
2013=100%
łańcuchowe
number jednopodstawowe
2011=100%
w tys. 2013 = 100% 2011 = 100%
2010 1394 68 - 68  100% = 76
89
2011 1828 89 89  100% = 131 89  100% = 100
68 89
102  100% = 102  100% =
2012 2093 102 89 114 89 114
2013 2059 100 100  100% = 98 100  100% = 113
102 89
125  100% = 125 125  100% = 140
2014 2569 125 100 89
99  100% = 99  100% =
2015 2029 99 125 79 89 111
124  100% = 124  100% =
2016 2555 124 99 126 89 140
time series analysis

Simple index numer

changes of indexes
1. converting the Fixed Base Index Number to Chain Base Index Number

Viewers in cinemas in Poznań in 2010-2016

Indeksy Indeksy Indeksy

Viewers Fixed base Index Chain Index Fixed base Index
Year
Lata Widzowie
(in thous) jednopodstawowe
2013=100%
łańcuchowe
number jednopodstawowe
2011=100%
w tys. 2013 = 100% 2011 = 100%
2010 1394 68 - 68  100% = 76
89
2011 1828 89 89  100% = 131 89  100% = 100
68 89
102  100% = 102  100% =
2012 2093 102 89 114 89 114
2013 2059 100 100  100% = 98 100  100% = 113
102 89
125  100% = 125 125  100% = 140
2014 2569 125 100 89
99  100% = 99  100% =
2015 2029 99 125 79 89 111
124  100% = 124  100% =
2016 2555 124 99 126 89 140
time series analysis

Simple index numer

changes of indexes
1. converting the Fixed Base Index Number to Chain Base Index Number
2. changing the base of fixed base index number

Viewers in cinemas in Poznań in 2010-2016

Indeksy Indeksy Indeksy

Viewers Fixed base Index Chain Index Fixed base Index
Year
Lata Widzowie
(in thous) jednopodstawowe
2013=100%
łańcuchowe
number jednopodstawowe
2011=100%
w tys. 2013 = 100% 2011 = 100%
2010 1394 68 - 68  100% = 76
89
2011 1828 89 89  100% = 131 89  100% = 100
68 89
102  100% = 102  100% =
2012 2093 102 89 114 89 114
2013 2059 100 100  100% = 98 100  100% = 113
102 89
125  100% = 125 125  100% = 140
2014 2569 125 100 89
99  100% = 99  100% =
2015 2029 99 125 79 89 111
124  100% = 124  100% =
2016 2555 124 99 126 89 140
time series analysis

Simple index numer

changes of indexes
1. converting the Fixed Base Index Number to Chain Base Index Number
2. changing the base of fixed base index number
3. converting the Chain Base Index Number to Fixed Base Index Number

Indeksy Indeksy
Fixed base relative
Year
Lata Chain relative
łańcuchowe jednopodstawowe
2014=1
2014 = 1
0,89 =
2010 - 0,95 0,93
0,87 =
2011 0,95 0,98 0,89
0,96 =
2012 0,98 1,10 0,87
2013 1,1 1 = 0,96
1,04

2014 1,04 1
2015 1,06 1  1,06 = 1,06
2016 1,02 1,06 1,02 = 1,08
2017 1,05 1,08 1,05 = 1,13
time series analysis

Simple index numer

An index number can also compare one item with another

Example:
The population of the Canadian province of British Columbia in 2013 was
4,494,232 and for Ontario it was 13,069,182.
What is the population of British Columbia compared to Ontario?

Population of British Columbia 4,494,232

P= X100 = X100 = 34.4
Population of Ontario 13,069,182

Interpretation: The population of British Columbia is 34.4 % of the population of Ontario.

Copyright@ 2015 McGraw-Hill Education

time series analysis

Simple index numer Average Price of Index

Year crude oil per barrel (base year =
($) 2017)
2010 79.48 156
Price index 2011 94.88 187
2012 94.05 185
pt
I p = 100
2013 97.98 193
2014 93.17 183

p0 2015
2016
48.66
43.29
96
85
2017 50.80 100
2018 65.23 128
2019 56.99 112
2020 39.68 78
2021 68.17 134
pt - price at time t 2022 83.13 164

p0 - price in the base period If the simple price index is more than 100
subtract 100 from the simple price index.
The result is the percentage increase in price
from the base period to the current period

If the simple price index is less than 100

Ip(2022/2017) =164
The price index for 2022, based on 2017 (as 100), is 164
subtract the simple price index from 100.
The result is the percentage by which the
item cost less in the base period than it does
in the current period
time series analysis

Simple index numer U.S. Field Production of

Year Crude Oil Index
(Thousand Barrels per Day)
2010 5484 100
Quantity index 2011 5674 103
2012 6523 119
qt
I q = 100
2013 7498 137
2014 8792 160

q0 2015
2016
9441
8844
172
161
2017 9357 171
2018 10941 200
2019 12289 224
2020 11283 206

qt - quantity at time t If the simple quantity index is more than 100

subtract 100 from the simple quantity index.
q0 - quantity in the base period The result is the percentage increase in
quantity from the base period to the current
period

If the simple quantity index is less than 100

Iq(2020/2010) =206
The quantity index for 2020, based on 2010 (as 100), is 206
subtract the simple quantity index from 100.
The result is the percentage by which the
quantity is less in the base period than it
does in the current period
time series analysis

Composite index numbers

• A composite index number is an index number obtained by combining the
information from a set of economic commodities.
• It measure the percentage changes of a group of items (not one item)
 Weighted Aggregate Price Indexes
Indeks wartości
Iw =  q1 p1
 q0 p0
Laspeyres index

 p1q0 A Laspeyres price index uses base L

Iq =  q1 p0
Ip =
L
 q0 p0
time period quantities as weights

 p0q0 It measures the relative change in the cost of purchasing

these items in the quantities specified in the base period

Paasche index

Ip =
P  p1q1 A Paasche price index uses current
time period quantities as weights P
Iq =  q1 p1
 p0q1  q0 p1
It measures the change in the cost of purchasing items, in
terms of quantities relating to the current period

Fisher index

F
Ip = L P
IpIp
F
Iq = L P
Iq Iq
Example
Given below are the price quantity data, with price quoted in PLN per kg and
production in qtls.
Find:
(1) Laspeyre’s Index
(2) Paasche’s Index
(3) Fisher Ideal Index.

2012 2017
ITEMS PRICE PRODUCTION PRICE PRODUCTION

BEEF 15 500 20 600

MUTTON 18 590 23 640

CHICKEN 22 450 24 500

Solution
2012 2012 2017 2017

( p1q0 ) ( p0 q0 ) ( p q ) ( p0 q1 )
ITEMS PRICE PRODUCTION PRICE PRODUCTION

( p0 ) (q0 ) ( p1 ) (q1 ) 1 1

BEEF 15 500 20 600 10000 7500 12000 9000

MUTTON 18 590 23 640 13570 10620 14720 11520

CHICKEN 22 450 24 500 10800 9900 12000 11000

TOTAL 34370 28020 38720 31520

1.Laspeyre’s index: 2. Paasche’s Index:

I pLp01==pp11qq00 100 = 34370 100 = 122.66 I ppP01== 
pp11qq11 100 = 38720 100 = 122.84
pp00qq00 28020 pp00qq11 31520
measures the relative change in the cost of purchasing these items measures the change in the cost of purchasing items,
in the quantities specified in the base period in terms of quantities relating to the current period

3. Fisher Ideal Index:

pq pq 34370 38720
I pF = I pL IPpP01 =  =  100 = 122.69
1 0 1 1

 p q 0
p q0
100 0
28020
1
31520
Comparison of the Laspeyres and Paasche indexes
– The Laspeyres index measures the ratio of expenditures on base year quantities
in the current year to expenditures on those quantities in the base year

– The Paasche index measures the ratio of expenditures on current year quantities
in the current year to expenditures on those quantities in the base year

– Since the Laspeyres index uses base period weights, it may overestimate the rise in the
cost of living (because people may have reduced their consumption of items that have
become proportionately more expensive than others)

– Since the Paasche index uses current period weights, it may underestimate the rise in
the cost of living

– The Laspeyres index is usually larger than the Paasche index

– With the Paasche index it is difficult to make year-to-year comparisons, since every year
a new set of weights is used
– The Paasche index requires that a new set of weights be obtained each year,
and this information can be expensive to obtain
– Because of the last 2 points above, the Laspeyres index is the one most commonly used
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
time series analysis

Consumer Price Index (CPI)

• The measure most commonly used as a general indicator of the rate of

price change for consumer goods and services is the consumer price index

• The CPI assumes the purchase of a constant ‘basket’ of goods and

services and measures price changes in that basket alone

• The description of the CPI commonly adopted by users is in terms of its

perceived uses; hence there are frequent references to the CPI as
– a measure of inflation
– a measure of changes in purchasing power, or
– a measure of changes in the cost of living
time series analysis

Consumer Price Index (CPI)

• The CPI has been designed as a general measure of price inflation for the
household sector.
• The CPI is simply a measure of the changes in the cost of a basket, as the
prices of items in it change
• the total basket is divided into 230 commodity groups e.g:
– food
– alcohol and tobacco
– clothing and footwear
– housing
– household contents and services
– health
– transportation
– communication
– research
– education
– financial and insurance services
time series analysis

Dow Jones Index (CPI)

The Dow Jones Industrial Average (DJIA)

price-weighted measurement stock market index of 30 prominent companies listed on

stock exchanges in the United States.

one of the oldest and the most commonly followed equity indices

but - many professionals consider the Dow to be an inadequate representation of the

overall U.S. stock market compared to broader market indices such as the S&P 500 or
Russell 2000 Index. The DJIA includes only 30 large companies and is a price-weighted
index, unlike later stock indices which use market capitalization. Furthermore, the DJIA
does not use a weighted arithmetic mean.

"Standard & Poor's 500 Index – S&P 500". Investopedia. Archived from the original on June 14, 2012. Retrieved September 15, 2019.