Index Numbers and Inflation Measures Flashcards

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What is an index number in economics?

It shows how something changes over time, using a base year set to 100.

What is the base year in an index?

It is the year chosen for comparison. Its index is set to 100.

How do you calculate a simple price index for a single good?

Divide the current price by the base year price, then multiply by 100.

What does an index value of 112 mean?

The average price level is 12% higher than in the base year.

How do you find the inflation rate between two years using index numbers?

Subtract the earlier index from the later index, divide by the earlier index, then multiply by 100.

What is a weighted price index?

It is an index that gives more weight to items that take a bigger share of spending.

Why do inflation measures use weights?

To reflect how important each item is in an average household’s budget.

What is the “basket of goods and services”?

A sample of items households buy. Their prices are tracked to measure inflation.

What is the Consumer Prices Index (CPI)?

CPI is a weighted index of consumer prices. It is the UK’s main measure for the inflation target.

What is one key difference between CPI and RPI?

RPI includes mortgage interest payments (housing costs). CPI does not.

What does it mean if the index falls from one year to the next?

Average prices fell over that period. This is deflation for that time.

What happens when the base year is changed?

All index values are rescaled so the new base is 100, but percentage changes between years stay the same.