Using index numbers
Much of the data you will come across in your course is presented in the form of index numbers and index series.
The following shows the consumer price index for two countries, Italy and Turkey. The consumer price index is a number calculated every year, which indicates how much on average consumer prices have risen since the previous year.
If we look at prices in Italy between 2000 and 2001 we can see that the consumer price index has increased from 89 to 91. The first point to note is that this DOES NOT MEAN that prices have gone up by 2%. That is not how index numbers work!
To calculate the increase in consumer prices we would need to find the percentage change between these two index numbers.
In the above example
We can say, therefore, that the prices have gone up by 2.3% over the two years.
Now it's your turn
Calculate the increase in consumer prices:
- from 2003 and 2007 for both countries
- from 2001 to 2009 for both countries
- from 2008 to 2009 for both countries
NB The index number in 2005 for both countries is 100. This means that the index has been calculated in such a way that all prices are being compared with those that existed in 2005. 2005 is referred to as the base year. Therefore, when you use an index, it is said that you are valuing something in terms of constant prices i.e. in the case of the example, all prices are benchmarked against those that existed in 2005.