Understanding Index Numbers
Time series data are often expressed in terms of index numbers
One year is selected as the base year and this is given a value of 100.
The output for other years is then shown by their percentage change from 100
Years 1978 1979 1980 1981 1982 1983 1984
Output of manufacturing 106.1 96.8 91.0 93.7 97.6 100 101.3
Output of services 89.6 89.2 89.5 90.8 93.4 100 104.1
· The base year is 1983 =100
· This means manufacturing output fell by 6.1% since 1978
· This means services output rose by 10.4 % since 1978
· The change between 1981 and 1982 for service was 2.6 points which equals
2.6/ 90.8 *100 = 2.8% rise
Nominal or (money) GDP is GDP measured in terms of the prices operating in that year in which the output is produced. But this may not be an accurate reflection of how much goods and services the country is producing. This is because nominal GDP does not take into account inflation.
E.G. if 100 million goods are produced at a price of £5 then GDP is £500m
“ “ £ 6 then GDP is £600m
· Real GDP measures GDP at constant prices
· Real GDP = nominal GDP * price index in base year
Index in year a
E.G. 1
2000 nominal GDP is £800 bn price index is 100
2001 nominal GDP is £864 bn price index is 105
· £864bn * 100/105 = £822.86 bn
E.G. 2
2002 nominal GDP is £1,000 bn price index 100
2003 nominal GDP is £1,092 bn price index 104
calculate
i) real GDP; £1,092 * 100/104 = £1,050
ii) % increase in real GDP = 50/1000 * 100 = 5%
E.G.3 1985 nominal GDP =$150 bn
1994 “ “ =$300 bn : inflation = 50%
Therefore index would be 100 in 1985 and 150 in 1994
Therefore real GDP = $300bn * 100/ 150 =$200 bn
1979 1981 1985 1990 1992
Nominal GDP (£bn at current prices) 172.4 217 307 479 514.6
GDP defaltor(1985=100) 61.0 79.9 100.0 133.6 147.9
Real GDP
q. How much did real GDp grow between 1979 and 1981
q. How much did real GDP grow between 1990 and 1992
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