When displaying time series data, it often make sense to use index numbers.
Index numbers are a simple way of making it easier to compare numbers over a period of time. Index numbers measure relative changes in the price of a sum of representative data.
For example, the FTSE-100 is an index displaying the average share price movements of the biggest 100 companies listed on the London Stock market.
In the case of the FTSE-100, companies are given a weighting depending on their stock market capitalisation. The index measures the change in the price of all 100 shares; the price change is also multiplied by the relative weighting of the company. The FTSE -100 index thus gives an overall measure of the performance of average shares.
Index Numbers and Base Years
- To measure relative change in prices, we often use a base year to provide a reference point for changes in prices.
- A base year is chosen (say 2000) in this year the index is set to 100. This is so it is easy to make percentage comparisons.
- Therefore, if the general price level increase by 3.4% in the UK. The price index in 2001 would be 103.4
When comparing exchange rates it is often advantageous to use index numbers. For example, currencies can be quite hard to compare. But, when converted into index numbers it is easier to see relative changes of currencies.
Economist Commodity Price Index
Dec 18th 2007
- Dollar Price Index = 217
- Dollar price index metals = 237
- Sterling Index = 163
- Euro Index = 139
These index numbers show that the price of commodities has been increasing throughout the world. The dollar price of commodities has increased more because of the weakness of the dollar.
Difficulties in Using Index Numbers
- The most commonly used index number is the Consumer price index. However, this also present a problem when trying to use an index to measure changes in the cost of living.
- One basic difficulty is that the goods bought are constantly changing. Therefore, measuring changes in price is not an accurate reflection of what is happening because the quality of goods may be changing.
- See problems measuring inflation
- Consumer price index CPI and Retail Price Index RPI
More on Index numbers