Post on 01-Jan-2016
description
These allow us to reduce complicated statistical changes down to one single number.
Example: CPITakes prices for a large ‘bundle’ of goods
and calculates an index number that gives good indication of prices and whether inflation or deflation is occurring.
Assume that the economy only produces and consumes one good (food). Assume that this food is traded at the following prices each day
Day Price $
Monday 3
Tuesday 6
What can we say about the general price level?
It has doubled!!
What if there were two types of goods? (food and capital goods)
Day Prices
Food Capital Goods
Monday 3 4
Tuesday 6 7
What can we say now about the general price level?
Not so easy now to comment about the general price level…… this is why we use a price index.
Index
An index requires a base period, so that we can make comparisons from this period to the next We will make Monday our base period
The base year is always given an index value of a one with some zeros after it
We will choose 100 for this index
Now what would the index number have to be on Tuesday to tell us at a glance that prices have doubled?
100
200
This MUST be done from the base year:Step one- calculate the percentage change
in price from the base year (difference/original × 100)
Step two- use this percentage value to adjust the index value from the base (usually 1000) How do we do this?
If we have a base value of 1000, this is the same as 100.0. If we get a % change from the base year of 5.6 %, we add this to 100.0 and take away the decimal point. E.g. 100.0 + 5.6 = 105.6 = 1056
Inflation is calculated from one period to the next (NOT FROM THE BASE YEAR!).
This means we need to use our percentage change formula% change =
e.g.
100old
oldnew
YearYear IndexIndex InflationInflation
20072007 10451045 --
20082008 10721072 (1072 – 1045)(1072 – 1045) × 100× 100
10451045
20092009 11061106
GoodGood Quantity Quantity PurchasedPurchased
Month oneMonth one Month twoMonth two Month threeMonth three
Cheese Cheese (1kg block)(1kg block)
44 $12.00$12.00 $11.00$11.00 $12.50$12.50
NewspaperNewspaper 3030 $1.20$1.20 $1.50$1.50 $1.60$1.60
Topup card Topup card (cell ph)(cell ph)
11 $10.00$10.00 $10.00$10.00 $10.00$10.00
TOTAL TOTAL expenditureexpenditure
(Q(Q×P)×P)
Price IndexPrice Index (calculated from (calculated from base year)base year)
Rate of Rate of InflationInflation
(calculated from (calculated from previous period)previous period)
Price per unit
Most common weighted price index used to calculate inflation.
The CPI is calculated four times per year (quarterly) and results from household surveys conducted by Statistics NZ on a regular basis.
Prices for a basket of over 700 goods and services are surveyed regularly and in a number of area’s in NZ.
These goods are decided upon as to what the ‘average’ NZ household purchases E.g. in 1990 a discman may have been included, BUT in
2009 an ipod would more likely be included instead.
It fails to include prices for goods that are difficult to measure, e.g. second hand goods
Measures changes in retail prices as they affect the average household… BUT what is the average household?
Spending patterns are constantly changing (because our income, tastes and fashions are constantly changing, new goods coming into the market) which creates a problem with weighting various categories of goods and services
Many goods change in design, quality and performance (with ever changing technology), e.g. the computer market- computers and laptops are constantly being improved.
It’s an acceptable internationally comparable statistic BUT other countries weightings, basket of goods, and review periods may differ.
Producer price index: measures inflation via the costs of production. The PPI inputs are such things as electricity, fuels, materials, etc
Food price index
Capital goods price index (CGPI): measures inflation in terms of capital goods (investment goods= used to make other goods and services) e.g. office and accounting machinery, ovens, vehicles, etc.