TOPIC 2

Index Numbers
INDEX RELATIVES
 An Index Number measures the percentage change in
the value of some economic commodity over a period
of time

 It is always expressed in terms of a base of 100

 A simple index number measures the relative change in

just one variable.

 Index numbers are calculated as:

Value in year n 2
Index for year n (to base 100)   100
Value in base year
INDEX NUMBERS
Some notation
Po =price at base time point
Pn =price at some other time point
Qo =quantity at base time point
Qn =quantity at some other time point

3
 Why
Easier to comprehend than
actual numbers (percent compute
change) indexes?
$357,013$323,604
$ 3 4 5 ,6 5 1 ,2 8 9 ,5 6 0 decrease of $33,409
or 10% ? decrease is 10.3%

Facilitate Provide convenient

comparison of ways to express
unlike series the change in the
total of a CPI
Bread $0.89 heterogeneous
Car $18,000 group of items
Dress $200
Surgery $400,000
Why Convert Data to Indexes?
Indexes: Four classifications Qn
100
Quantity Qo
Pn
Price  100 Measures the changes in
Po
quantity consumed from the
Measures the changes in base period to another period.
prices from a selected
base period to another
Special purpose
period.
Combines and weights a
heterogeneous group of series
Value
to arrive at an overall index
Measures the changes in showing the changes in
the value of one or more business activity from the
items from the base base period to the present.
period to the given period
(PxQ). Types of Index Numbers
Price Index

The price index is a summary measure that combines the

price changes for a group of items, using weights to give each
item its appropriate importance.

Example: The consumer price index (CPI) measures the

combined effect of price changes in many goods and services
purchased by households with 2000 as base year (as last
revised).

6
Quantity

The quantity index is a summary measure of

relative changes over time in the quantities or
volume of some measurable characteristic such as
production, sales, inventories, or consumption of a
specific commodity or group of commodities.

Example: The volume of production index (VoPI)

monitors the changes in the quantity of a
commodity produced or manufactured by the
establishments.
 Value

The value index are summary measures of relative

changes over time in the value (price of commodity
x quantity consumed) of a commodity or group of
commodities.

Example: The All Shares Index of the Kuala Lumpur

Stock Exchange Composite Index (KLCI) tracks the
changes in total market capitalization (last traded
price x outstanding shares) of all the common
stocks of companies listed at the Exchange with
base value of 100 points in 1977 (as last revised).
Special purpose

VALUE AND SPECIAL PURPOSE

INDEXES
 Price Relatives
 Price relatives are helpful in understanding and
interpreting changing economic and business
conditions over time.

RM 2.23 (5 Jan 2019)

Now

Price of
Gasoline
Then

RM1.37
(1 May 2004)
 Price Relatives
 A price relative shows how the current price per unit
for a given item compares to a base period price per
unit for the same item.
 A price relative expresses the unit price in each period
as a percentage of the unit price in the base period.

 A base period is a given starting point in time.

Price in period n
Price relative in period n   100
Base period price
INTERPRETATION
• An index number is always referenced back to a
base year
• This is always given a value of 100
• Subsequent figures ( the next years) are then
scaled in relation to the base year
• So an index gives the change since the base year
• Therefore we can arbitrarily change the base year,
at least from a mathematical point of view

12
SIMPLE PRICE INDEX
A simple price index number measures the relative change
in just one variable.
Suppose we have the price of an item for each year over a
four year period:
Year Price Calculation Index
1 RM2.00 (RM2 / RM2)* 100 100
2 RM2.20 (RM2.20/RM2)* 100 110
3 RM2.40 (RM2.40/RM2)* 100 120
4 RM2.90 (RM2.90/RM2)* 100 145

We could choose Year 1 as the base year

The calculation is: Pn
Subsequent calculations are:  100
Po
Year 1 = 100 means Year 1 is the base year
13
Year 3 = 120 means price increased by 20% since Year 1. But, as
compared to Year 2, price increased by 9.09% (2.4/2.2 * 100).
 Pn
CHANGING THE BASE YEAR Po
 100
Because an index is just scaled, changing the base year
mathematically is just a case of maintaining the ratio between
the numbers.
100 100 100
Take this index series:  100  100  100
110 120 145

(Year1=100) (Year 2=100) (Year 3=100) (Year 4=100)

Year Price Index 1 Index 2 Index 3 Index 4
1 RM2.00 100 90.91 83.33 68.97
2 RM2.20 110 100.00 91.67 75.86
3 RM2.40 120 109.09 100.00 82.76
4 RM2.90 145 131.82 120.83 100.00

To make year 2 the base year, divide each figure in Index 1

by 110 (the index of year 2 which is now the new base year)
and multiply the result by 100:
14
Calculate the index 3 using Year 3 as the base year
Calculate the index 4 using Year 4 as the base year
 PRACTICAL ISSUES
• Whilst the mathematics of changing the base year
are easy, for a real index number the decision to
start from a new base year is a major one.
• Most index numbers consist of a basket of goods
and this may have to change when the base year
changes
• Ideally we would like the base year to be typical –
having no unusual features but this rarely happens
• Base years are usually changes when the index has
large numerical values since this may lead to
confusion between the points change in the index
15
and the percentage rise in the data.
 CHANGING THE BASE YEAR
One of the reasons for doing this might be the original
base time point is too far in the past to be relevant
today and more recent one is needed.
E.g. : Construct new index using year 1987as the based
year
Year Old Index (1960=100) New Index(1987=100)
1987 324 324/324 * 100 = 100.00
1988 351 351/324 * 100 = 108.33
1989 377 377/324 * 100 = 116.36
1990 384 384/324 * 100 = 118.52
1991 391 391/324 * 100 = 120.68
1992 404 404/324 * 100 = 124.69
16
1993 428 428/324 * 100 = 132.10
Question: (continued)

SIMPLE PRICE INDEX

The table below shows the employee’s wages of a company from 1998
to 2001.
Year Wages (x RM 1000)

1998 200
1999 320
2000 450
2001 600
(i) Construct the data into an index number series (1998–2001) with
1998 as the base year.
(ii) Transform the series (1998–2001) so that the base year is 1999.
17
 Pn In
 100  100
Po Io
SIMPLE PRICE INDEX (continued)

Year RM (i) Index (ii) Index

(‘000) (based Year=1998) (based Year=1999)
1998 200 200 200 100
 100  100  100 or 100  62.50
200 320 160
1999 320 320 320 160
 100  160  100 or 100  100.00
200 320 160
2000 450 450 450 225
 100  225 100 or 100  140.63
200 320 160
2001 600 600 600 300
 100  300 100 or 100  187.50
18
200 320 160
 LINKING INDEX SERIES
Although there are practical reasons for changing the base year
of an index, we usually want a continuous series to work with.
We therefore need to be able to link series together.
E.g.: Construct a chain index using year 1 as a base year.
Year Old Index New Index Calculation Chain Index (Year 1=100)
1 100 100.00 100.00
2 126 126.00 126.00
3 169 100 169 169
4 110 110*1.69 185.9
5 115 115*1.69 194.35
6 120 120*1.69 202.8
The key to this is having the old and new The ratio is 169 to 100
values of one year – here year 3 Or 1.69 to 1
Use this on the other index 19
Pn numbers
alternative :  100
Po
Question:
LINKING INDEX SERIES
Construct a chain index using year 3 as a base year.
Year Old Index New Index Calculation
1 100
2 126
3 169 100 100
4 110 110
5 115 115
6 120 120

20
solution:
LINKING INDEX SERIES
Construct a chain index using year 3 as a base year.
Year Old Index New Index Calculation Chain Index (year 3=100)
1 100 100/1.69 59.17
2 126 126/1.69 74.56
3 169 100 100 100
4 110 110 110
5 115 115 115
6 120 120 120
The key to this is having the old and new The ratio is 169 to 100
values of one year – here year 3 Or 1.69 to 1
Use this on the other index
numbers
21
AGGREGATE PRICE
INDEXES
An aggregate price index is developed for the specific purpose of
measuring the combined change of a group of items
UNWEIGHTED AGGREGATE PRICE
INDEXES

 An unweighted aggregate price index in period t,

denoted by It , is given by

It 
 P
it
 100
Pio

where
Pit = unit price for item i in period t
Pi 0 = unit price for item i in the base period
 SIMPLE AGGREGATE PRICE
INDEX
In most cases we are interested in the prices of a “basket of
goods”, and not just one item ( employee’s wages) .
We therefore need an aggregate index.
Item Price Yr0 Price Yr1 Price Yr2
1. Add up columns A £1.00 £1.10 £1.15
B £2.00 £2.30 £2.35
2. Use  Pn C £5.00 £5.60 £5.70
 100
 Po £8.00 £9.00 £9.20
100 112.5 115
9
100
8
What is “wrong” with this?
Average for these 3 prices would be meaningless 24

the quantities for different item differ so much from each other and, secondly, the unit
prices are themselves for different quantities
 Question
The table below shows the average prices received by farmers
for specified commodities in 1992,1995 and 1999.
Price (in RM)
commodities 1992 1995 1999
A(P/liter) 0.26 0.31 0.56
B(P/kilo) 1.05 1.17 2.15
C(P/kilo) 0.75 0.85 1.40
D(P/kilo) 2.50 2.20 2.60
Taking 1992 as base year, find simple aggregate price index in year 1999.

SAPI 1999 
 P n
 100 
0.56  2.15  1.4  2.6
 100  147.1
P o 0.26  1.05  0.75  2.5

25
 AVERAGE PRICE RELATIVES
(APR)
P
INDEX   100 n

Numbers of items P
I  APR
0

N
A price relative is a simple index of the price now of an item in
relation to the price in the base year.
Item Price Yr0 Price Yr1 Price Yr2 PR Yr0 PR Yr1 PR Yr2
A £1.00 £1.10 £1.15 100 110 115
B £2.00 £2.30 £2.35 100 115 117.5
C £5.00 £5.60 £5.70 100 112 114
Pn 300 337 346.5
I  100
1. Find PR’s for each item Po
100 112.33 115.5
2. Add up columns  I
3. Find the average I Note that we get different
I APR 
N answers this time
26
If price was weighted, this indicate the relative importance of
each of the prices
 QUESTION
The table below shows the average prices received by farmers
for specified commodities in 1992,1995 and 1999.
Price (in RM)
commodities 1992 1995 1999
A(P/liter) 0.26 0.31 0.56
B(P/kilo) 1.05 1.17 2.15
C(P/kilo) 0.75 0.85 1.40
D(P/kilo) 2.50 2.20 2.60

Taking 1992 as base year, find average price relatives index.

27
Solution
Price (in RM) Price Relatives

1992 1995 1999

1992 1995 1999
com (4) (5) (6)
(1) (2) (3)
=(1)/(1)x100 =(2)/(1)x100 =(3)/(1)x100
A(P/liter) 0.26 0.31 0.56 100 119.23 215.38
B(P/kilo) 1.05 1.17 2.15 100 111.43 204.76
C(P/kilo) 0.75 0.85 1.40 100 113.33 186.67
D(P/kilo) 2.50 2.20 2.60 100 88 104
Taking 1992 as base year, find average price relatives index in year 1999.

215.38  204.76  186.67  104

APRI1999   177.7
4
28
 HOW TO PROGRESS
 The indices so far have either dealt with a
single item or assumed that all items are of
equal importance.
 This is obviously not true!
 We need an index which can deal with a
“basket of goods” and take account of the
relative importance of the items in the basket

29
 Weighted Aggregate Price
Indexes
 With a weighted aggregate index each item in the group is
weighted according to its importance, which typically is
the quantity of usage.
 Letting Qi = quantity for item i, the weighted aggregate
price index in period t is given by

It 
 PQ
it i
 100
P Q
io i

where the sums are over all items in the group

 The commonly use aggregate price indexes are:
1. Laspeyres price index (LPI). 30

2. Paasche price index (PPI).

 Laspeyres price index (LPI)
 When the weights are quantities at base year, the index is called
a Laspeyres price index (LPI).
 This is a base-weighted index, i.e. it uses the quantities in the base
year to assess the relative importance of the items

 P Q 
n 0
Lp   100
 P Q 
0 0

 The advantages of LPI are: 1) the price indexes for all

years can be compared. 2) new quantities do not have to
be determined.

 Disadvantages: 1) does not reflect changes in buying

patterns over time. 2) it may overweight goods whose 31

prices increase.
Paasche price index (PPI)
 When the weights are quantities at current year, the
index is a Paasche price index (PPI).
 This is a current-weighted index, i.e. it uses the quantities in
the current year to assess the relative importance of the items

 P Q 
n n
Pp   100
 P Q 
0 n

 The advantage of PPI is that it incorporates current

quantity figures in the calculations.
reflect current buying habits
 The disadvantage of PPI is ascertaining quantity figures
for each time period is expensive. 32

It may overweight goods whose prices decrease.

  P Q 
n 0  P Q 
Lp   100
LPI vs PPI:
n n
Pp   100
 P Q 
0 0  P Q 
0 n
 LPI uses the same expenditures weights (fixed weight).
Thus, no need to use new expenditure weights in
calculation of price index.
 PPI uses different expenditures weights in each period, it
means that it can only be used to make comparison
between the current and base period.
 Thus, LPI is preferred to PPI.
 In a period of price rises and therefore changing demand
patterns, LPI will tend to overestimate the price rises
while PPI will tend to underestimate the price rises.
 This is because when P rises, Q will drop. Q is assumed
to be fixed (in the case of LPI) while Q will drop in the
case of PPI. 33
FISHER’S IDEAL INDEX
 To overcome the shortcomings of Laspeyres
and Paasche index numbers, Fisher’s ideal
index number may be used.
 Fisher’s ideal index numbers is the
geometric mean of LPI and PPI.
 Fisher’s Ideal Index
 LPI  PPI

 (344.44)(436.36)
 387.69 34
OTHER INDICES
These indices can be turned around to make quantity indices:

Laspeyres Quantity Index, Lq =

 P Q  100
0 n

 P Q 
0 0

Paasche Quantity Index, Pq =

 P Q  100
n n

 P Q 
n 0

Or become a Value Index =

 P Q  100
n n

 P Q 
0 0 35
Example:
Mr. Wong owns stock in three companies. The table
shows the price per share at the end of 2010 and 2011 for
the three stocks and the quantities he owned in 2010 and
2011.
Stock Prices (in RM) Numbers share
2010 2011 2010 2011
MBB 1 2 30 50
GWR 5 4 15 30
BP 6 6 40 20

Find the Laspeyres’ Price Index, Paasches’ Price Index,

Fishers’ ideal price index and value index in 2011 using
2010 as a based year
  Laspeyres’ Price Index, Paasches’ Price Index in 2011 (2010 = 100)
Stock Prices (in RM) Numbers share  P Q  100
n 0  P Q 
n n
Lp  Pp   100
10 11 10 11  P Q  0 0  P 0Q  n
MBB 1 2 30 50
GWR 5 4 15 30 
 P Q  100
11 10

 P Q 
11 11
 100
BP 6 6 40 20  P Q  10 10   P Q
10 
11

Item P10 * Q10 P11 * Q10 P10 * Q11 P11 * Q11 1. Multiply
MBB 1(30) = 30 2(30) = 60 1(50) = 50 2(50) = 100 each price by
GWR 5(15) = 75 4(15) = 60 5(30) = 150 4(30) = 120 the quantity
BP 6(40) = 240 6(40) = 240 6(20) = 120 6(20) = 120 in Year 0
Σ 345 360 320 340 2. Add up each
 LPI = 360/345 * 100 = 104.35 column
 PPI = 340/320 * 100 = 106.25

Lp   (2(30)  4(15)  6(40))

 100 Pp 
  2(50)  4(30)  6(20) 
 100
 (1(30)  5(15)  6(40))  1(50)  5(30)  6(20) 
360 340 37
 (100)  104.35  (100)  106.25
345 320
 Fishers’ ideal price index and value index in 2011 (2010 = 100)
Stock Prices (in RM) Numbers share
2010 2011 2010 2011 Value 
  P Q   100
n n

MBB 1 2 30 50 PQ 
0 0

GWR
BP
5
6
4
6
15
40
30
20 
  P Q   100
11 11

P Q 
10 10

Item P10 * Q10 P11 * Q10 P10 * Q11 P11 * Q11

MBB 1(30) = 30 2(30) = 60 1(50) = 50 2(50) = 100
GWR 5(15) = 75 4(15) = 60 5(30) = 150 4(30) = 120
BP 6(40) = 240 6(40) = 240 6(20) = 120 6(20) = 120
Σ 345 360 320 340

 LPI = 360/345 * 100 = 104.35  FPI =  (104.35)(106.25)

 PPI = 340/320 * 100 = 106.25 =105.3
 Value index = 340/345 * 100 = 98.55
Value   (2(50)  4(30)  6(20))  100
 (1(30)  5(15)  6(40)) 38

340
 (100)  98.55
345
 CONSUMER PRICE INDEX
(CPI)
 CPI is seen as a general indicator of the change in
retail prices paid by households for goods and
services.

 It is most widely used indicator of inflation for

consumption expenditure. CPI measures the
changes in the general level of prices of a fixed
basket of goods and services which represents the
items which are normally consumed by an
average household in Malaysia with reference to
the base period. 39
 CONSUMER PRICE INDEX
(CPI)
(continued)
 CPIbasket includes those goods and services
which are important in terms of the size of the
expenditures made by Malaysian households.

 CPI is based on the prices of about 430

representative items which reflect the combined
price movements each month of the thousands of
items that are bought by households in Malaysia.
These 430 items are selected based on the
Household Expenditure Survey (HES). 40
 CONSUMER PRICE INDEX
(CPI) (continued)
 Thispublication contained reports on the patterns of
consumption expenditure of households based on the
nine main groups i.e. :-
i) Food
ii) Beverages and tobacco
iii) Clothing and footwear
iv) Gross rent, fuel and power
v) Furniture, furnishings and household equipment and activities
vi) Medical care and health expenses
vii) Transport and communication
viii) Recreation, entertainment, education and cultural services.
ix) Miscellaneous goods and services.
41
 CONSUMER PRICE INDEX
(CPI)
(continued)
 sometimes called the cost-of-living index

 measures
changes through time in the price level of
consumer goods and services purchased by households

 The
annual percentage change in a CPI is used as a
measure of inflation.

 For example, using the years 2005 as a base period with a

value of 100, the CPI for April 2009 was 111.5, meaning
that prices had increased by an average of 11.5 percent
from the base period.
42
 Consumer Price Index (CPI)(continued)
Bank Negara Malaysia reports this index monthly. It describes the
changes in prices from one period to another for a “market basket” of
goods and services.
CPI Index
Weight (2010
=100) 100.0
    CPI
  Nov-13 108.6
  Dec-13 108.9
2014 Jan-14 109.5
  Feb-14 109.8
  Mar-14 109.9
  Apr-14 109.9
  May-14 110.0
  Jun-14 110.2 Year
  Jul-14 110.3
  Aug-14 110.5
  Sep-14 110.7
  Oct-14 111.3 The CPI in Mar 2015 is 110.9 means price increased by
  Nov-14 111.9 10.9% as compare to year 2010.
  Dec-14 111.8 On the yearly basis, the CPI for May 2015 is 9.09% (109.9
2015 Jan-15 110.6 to 110.9) higher than March last year. 43
  Feb-15 109.9
 Usefulness of CPI

It allows consumers to
determine the effect of
price increases on their
purchasing power.

It computes It is an economic
It is a
real income: indicator of the rate
yardstick for
real income = of inflation in the
revising wages,
money Malaysia.
pensions,
alimony income/CPI
payments, etc. (100)

Consumer Price Index

FORMULA USED IN CALCULATING
THE CPI:

CPI =  P Q  100
n 0

 P Q 
0 0
Where:
Pn = Price per unit of an item in the current
period.
Po = Price per unit of an item in the base period.
Qn = Quantity consumed of an item in the current
period.
Qo = Quantity consumed of an item in the base
period. 45

PnQn = Expenditure value in the current period.

PQ = Expenditure value in the base period.
 CONSUMER PRICE INDEX
(CPI)
(continued)
Example:
Commodity Base Period Current Period
2001 2002
Price Quantity Price Quantity
(RM) (Units) (RM) (Units)
A 36 100 40 95
B 80 12 90 10
C 45 16 41 18
D 5 1100 6 1200
The data above relate to a set of commodities used to calculate
the CPI of country X, in year 2002.
 PnQo x100 46

 PoQo
 CONSUMER PRICE INDEX
(CPI)
(continued)
Solution:
CPI =
 PnQo x100
 PoQo
Commodity PnQo PoQo
A 40x100=4000 36x100=3600
B 90x12=1080 80x12=960
C 41x16=656 45x16=720
D 6x1100=6600 5x1100=5500
Total  12336 10780
CPI = (12336 / 10780) X 100
= 114.4 47
NOMINAL & REAL CHANGE
Index numbers allow us to remove inflation from monetary
figures, and therefore show real changes;

For example, if the cost of renting has increased by 20% in 2

years. But the rate of inflation has been 8% over the same two
years. Then the rents have increased, in real terms, by 12%
(20%-8%)

Similarly, if the price of DVD’s has increased by 3% in the

last year, whilst inflation has been at 6%. Then the price of
DVD’s has decreased by 3% (3%-6%) in real terms 48
NOMINAL & REAL CHANGE
We can convert any nominal price (measured in current RM)
to a real price (adjusted for inflation):
Nominal price
Real price  100
CPI
Let’s consider an example using minimum wages.  Consider
the following table of the federal minimum wage between
1990-1998 and the CPI for the same years: 
Year minimum wage CPI

1990 RM 3.10 82.5

1992 RM 3.35 118.1
1994 RM 3.8 130
1996 RM 4.75 148 49
1998 RM 5.15 156.8
NOMINAL & REAL CHANGE
Year minimum CPI
wage
1990 RM 3.10 82.5
1992 RM 3.35 118.1 5.15  3.1
 100  66.1%
1994 RM 3.8 130 3.1
1996 RM 4.75 148
1998 RM 5.15 156.8

So the minimum wage has risen RM 2.05 or 66.1% over 8

years, but prices have risen as well.

Using the formula above we can calculate the real minimum

wage, i.e. the actual purchasing power of the minimum wage.
Nominal minimum wage 50
Real minimum wage   100
CPI
 NOMINAL & REAL CHANGE
Year minimum CPI Calculation Real minimum
wage wage
1990 RM 3.10 82.5 (RM 3.10/82.5)*100 RM 3.76
1992 RM 3.35 118.1 (RM 3.35/118.1)*100 RM 2.84
1994 RM 3.8 130 (RM 3.8/130)*100 RM 2.92
1996 RM 4.75 148 (RM 4.75/148)*100 RM 3.21
1998 RM 5.15 156.8 (RM 5.15/156.8)*100 RM 3.28

it actually peaked in 1990. So someone working for minimum

wage is actually worse off, even though the nominal wage has
risen, it has not kept up with inflation.

Nominal price
Real price  100 51
CPI
 NOMINAL & REAL CHANGE
Year CPI CPI Real minimum wage Real minimum
(1990=100) wage index
1990 82.5 100 RM 3.76 100
1992 118.1 143.15 RM 2.84 75.53
1994 130 157.58 RM 2.92 77.66
1996 148 179.39 RM 3.21 85.37
1998 156.8 190.06 RM 3.28 87.23

it actually peaked in 1990. So someone working for minimum

wage is actually worse off, even though the nominal wage has
risen, it has not kept up with inflation.

Nominal price
Real price  100 52
CPI
THE REAL PRICES OF EGGS
AND CONDENSED MILK
Real price 
Nominal price
CPI
 100
In 1970, a carton of 10 eggs cost about $0.94 in Singapore. In the
same year, the average cost of a 397g tin of condensed milk cost
$0.50. By 2000, the price of eggs had risen to $1.51 per carton,
and the average cost of a 397g tin of condensed milk was $1.00.
In real terms, were eggs more expensive in 2000 than in 1970?
Had condensed milk become relatively more expensive?

1970 1980 1990 2000

CPI 37.302 70.519 88.136 104.56
CPI (1970=100) 100.00
Nominal Prices
Eggs $0.940 $1.47 $1.45 $1.51
Condensed Milk $0.500 $0.93 $1.13 $1.00 53
 THE REAL PRICES OF EGGS
AND CONDENSED MILK
In 1970, a carton of 10 eggs cost about $0.94 in Singapore. In the
same year, the average cost of a 397g tin of condensed milk cost
$0.50. By 2000, the price of eggs had risen to $1.51 per carton,
and the average cost of a 397g tin of condensed milk was $1.00.
In real terms, were eggs more expensive in 2000 than in 1970?
Had condensed milk become relatively more expensive?
Nominal price
Real price  100
CPI
Nominal Prices
1970 2000
Eggs $0.94 $1.51 54

Condensed Milk $0.50 $1.00

MILK
1970 1980 1990 2000
CPI 37.302 70.519 88.136 104.56
70.519 88.136 104.56
CPI (1970=100)  100  100  100
100.00 37.302 37.302 37.302
 189.05  236.28  280.31
Nominal Prices
Eggs $0.940 $1.47 $1.45 $1.51
Condensed Milk $0.500 $0.93 $1.13 $1.00
Nominal price
Real Prices 
CPI
 100

Eggs 0.940
 100
1.47
 100
1.45
 100
1.51
 100
100 189.05 236.28 280.31
 $0.940  $0.778  $0.614  $0.539
Condensed Milk 0.5
 100
0.93
 100
1.13
 100
1.00
 100
100 189.05 236.28 280.31
 $0.5  $0.492  $0.478  $0.357

In real terms, were eggs more expensive in 2000 than in 1970 as compare to
condensed milk?
 THE REAL PRICES OF EGGS
AND CONDENSED MILK
Nominal Prices Real Prices

1970 2000 1970 2000

Eggs $0.94 $1.51 $0.94 $0.539
Condensed
$0.50 $1.00 $0.50 $0.357
Milk

The real cost of eggs fell by 43 percent from 1970 to 2000, while
the real cost of condensed milk fell by 29 percent over the same
period. In other words, condensed milk becomes relatively more
expensive compared with eggs in 2000.
It is these relative changes in prices that are important for the
choices that consumers make, not the fact that both eggs and
condensed milk cost more in nominal dollars today than they did
in 1970.
 KUALA LUMPUR COMPOSITE
INDEX
 Broad-based capitalization-weighted index
 Measures the performance of the aggregate market
capitalization of Malaysia
 Base year: 1977

 Calculation mode: Weighted by market capitalization

Current Aggregate Market Capitaliza tion

Index   100
Base Aggregate Market Capitaliza tion

Where the aggregate market capitalization is calculated as:

Σ(Price of stock* Number of shares)*market weighing factor.
57

Source:
http://www.bursamalaysia.com/website/bm/market_information/index_components.ht
KUALA LUMPUR COMPOSITE
INDEX

Year

58
QUESTION
Commodity Prices (in RM) Numbers sold (in `000)
2006 2007 2008 2006 2007 2008
Sugar 10 12 17 815 832 1176
Coffee 225 237 345 52 58 110
Milk 65 69 95 730 750 1315

1.) Using 2006 as a based year. find simple aggregate price index in
year 2007.
2.) Using 2006 as base year, find average price relatives index in year
2007.
3.) Find the Laspeyres’ Price Index in 2007 using 2006 as a based
year
4.) Find the Paasches’ Price Index in 2007 using 2006 as a based year
5.) Find the Fishers’ ideal price index in 2007 using 2006 as a based
year 59
QUESTION
Commodity Prices (in RM) Numbers sold (in `000)
2006 2007 2008 2006 2007 2008
Sugar 10 12 17 815 832 1176
Coffee 225 237 345 52 58 110
Milk 65 69 95 730 750 1315

1.) Using 2006 as a based year, find simple aggregate price index in
year 2007.

SAPI 2007 
 P n
 100 
12  237  69
 100  106
P o 10  225  65

60
QUESTION 2006
Price Relatives

2007 2008
Commodity Prices (in RM) Numbers sold (in `000)
(4) (5) (6)
2006 2007 2008
2006 2007=(2)/(1)x100
=(1)/(1)x100 2008 =(3)/(1)x100
(1) (2) (3)
Sugar 10 12 17 815100 832 1176
120.00 170.00
Coffee 225 237 345 52 100 58 110
105.33 153.33
Milk 65 69 95 730100 750 1315
106.15 146.15

2.) Using 2006 as base year, find average price relatives index in year
2007.

120  105.33  106.15

APRI 2007  100  110.49
300

P61
 Pn  100
I APR  0

w
 QUESTION
Commodity Prices (in RM) Numbers sold (in `000) p06q06 p07xq06 p08q06
2006 2007 2008 2006 2007 2008
Sugar 10 12 17 815 832 1176 8150 9780 13855
Coffee 225 237 345 52 58 110 11700 12324 17940
Milk 65 69 95 730 750 1315 47450 50370 69350

67300 72474 101145

100 107.69 150.29

3.) Find the Laspeyres’ Price Index in 2007 using 2006 as a based
year

L2007 
 P
07 Q06 
 100 
72474
 100  107.69
 P
06 Q06  67300

62
 Commodity Prices (in RM) Numbers sold (in `000)
 P Q 
n n
2006 2007 2008 2006 2007 2008Pp   100
Sugar 10 12 17 815 832 1176  P Q 
0 n
Coffee 225 237 345 52 58 110
Milk 65 69 95 730 750 1315

p06q06 p07q07 p08q08 p06q07 p06q08

8150 9984 19992 8320 11760

11700 13746 37950 13050 24750
47450 51750 124925 48750 85475
67300 75480 182867 70120 121985

4.) Find the Paasches’ Price Index in 2007 using 2006 as a based year

 P 07 Q07  75480
P2007   100   100  107.64
 P 06 Q07  70120
63
5.) Find the Fishers’ ideal price index in 2007 using 2006 as a based
year
75480
72474 P2007   100  107.64
L2007   100  107.69 70120
67300

FIPI 2007  (107.69)(107.64)  107.66

64
END OF TOPIC 2