Chapter 8
Chapter 8
Symbolically
Yt
I t 100
Y0
where It is the index number at time t, Yt is the
time series value at time t, and Y0 is the time
series value at the base period.
Simple Index Number
Example Year $
1990 1.299
1991 1.098
The table shows the price per 1992 1.087
gallon of regular gasoline in the 1993 1.067
U.S for the years 1990 – 2006. Use 1994 1.075
1995 1.111
1990 as the base year (prior to the 1996 1.224
Gulf War). Calculate the simple 1997 1.199
1998 1.03
index number for 1990, 1998, 1999 1.136
and 2006. 2000 1.484
2001 1.42
2002 1.345
2003 1.561
2004 1.852
2005 2.27
2006 2.572
Simple Index Number Solution
1990 Index Number (base period)
1990price 1.299
100 100 100
1990price 1.299
250.0
200.0
150.0
100.0
50.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Composite Index Number
Represents combinations of the prices or quantities of
several commodities
Disadvantage: Quantity of each commodity purchased
is not considered
A simple composite index is a simple index for a time
series consisting of the total price or total quantity of
two or more commodities.
Composite Index Number
Example
Calculate the total for the three stock prices each month.
These totals are shown in the “TOTAL” column in the Excel
workbook. Then the simple composite index is calculated by
dividing each monthly total by the January 2011 total. The
index values are given in the last column.
Simple Composite Index Solution
The plot of the 2011 simple composite index for these high-
technology stocks shows a dramatic drop in the stock market in
July 2011, followed by an increasing trend. Overall, the
composite price of these high-technology stocks increased
about 11% from January (Index = 100) to December (Index =
111.32).
Weighted Composite Price
Index
Q it0
Pit
i1
Steps for Calculating a
Laspeyres Index
Q
i 1
it0 Pit0 500(162.00) 100(21.46) 1000(27.73)
110,876
December
k
Q
i 1
it0 Pit0 500(183.88) 100(24.45) 1000(26.96)
121,325
Laspeyres Index Solution
k k
Q P
i , Jan i , Jan Q P
i , Jan i , Dec
I Jan i 1
k
100 I Dec i 1
100
k
Q
i 1
P
i , Jan i , Jan Q P
i , Jan i , Jan
i 1
110,876 121,325
100 100
110,876 110,876
100 109.42
The implication is that when weighted by quantities
purchased, the total value of these stocks increased by about
(109% - 100%) = 9% from January to December in 2011.
Paasche Index
Calculated by using price total weighted by the
purchase quantities of the period the index value
represents.
Compare current prices to base period prices at
current purchase levels
Disadvantages
Must know purchase quantities for each time period
Difficult to interpret a change in index when base period
is not used
Steps for Calculating a
Paasche Index
Q P it it
It i1
k
100
Q P it it0
i1
Paasche Index Number
Example
The 2011 January and December prices and
volumes (actual quantities purchased) in millions
of shares for three high-technology company
stocks are shown in Table 14.4. Calculate and
interpret the Paasche index, using January 2011
as the base period.
Q P
i , Jan i , Jan
I Jan i 1
k
100 100
Q
i 1
P
i , Jan i , Jan
k
Paasche Index Solution
Q P
iDec iDec
I Dec i 1
k
100
Q
i 1
P
iDec iJan
Moving Averages
Centered Moving Averages
Exponential Smoothing
The Moving Average Method
Et = wYt + (1 – w)Et–1
Exponential Smoothing
Example
The closing stock prices on the last
day of the month for Daimler–
Chrysler in 2005 and 2006 are given
in the table. Create an exponentially
smoothed series using w = .2.
Exponential Smoothing
Thinking Challenge
The closing stock prices on the last
day of the month for Daimler–
Chrysler in 2005 and 2006 are given
in the table. Create an exponentially
smoothed series using w = .8.
Forecasting
Et = wYt + (1 – w)Et –1
Calculation of Exponentially
Smoothed Forecasts
From Excel