6.6 INDEX NUMBERS
This video is relevant for this section despite it saying that it is for AQA.
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Economists often use index numbers to easily see the change in a variable over a period of time. Index numbers are often used for prices (such as house prices or the general price level), output of the economy, exports and many more. They are worked out by taking the base year and giving it an index value of 100. Subsequent years’ results are used to create an index score for that year. A percentage rise in the variable that we are observing results in the index score being above 100 and a percentage fall in the value compared with the base year results in an index number of below 100. If the index value were 105 for 2 periods away from the base year, then it would mean that our variable has increased by 5% between the base year and period 2. Raw data will never be indexed. The economists/ statisticians will have to work out the index themselves. This is fairly straightforward.
Index numbers are extremely useful at comparing trends. Below is a comparison of wheat, coarse grain and soybeans and soybean product output between 1990 and 2015. The index year is 2000, whereby all 3 variables have been indexed at a value of 100. We can see that all 3 of the products now are being traded more than in the indexed year with soybean and soybean products seeing the greatest increase in output. In 2008, trade of soybean products was around 50% higher than it was in 2000. Also, in 1990 soybean product trade was 40% less than it was in 2000. Over the whole period soybean and soybean products have seen output increase consistently. Trade in wheat has been consistent between the whole periods but post 2008 it is expected to rise (where the graph line turns paler, these values are forecasts). Coarse grains trade has been fairly stable as well but it has seen a slight increase over the time period.
Index numbers can be used for a variety of economic variables such as changes in price level (CPI and RPI), changes in the size of the economy (real and nominal GDP), changes in investment by firms, changes in consumption by households and many more.
Index numbers can be used for a variety of economic variables such as changes in price level (CPI and RPI), changes in the size of the economy (real and nominal GDP), changes in investment by firms, changes in consumption by households and many more.