Price index for a single item (Simple index number)

Chapter 7

Time series analysis and forecasting

Introduction to index numbers

Price index for a single item (Simple index number)

While analyzing time series data, decision maker often compares one value measured at one point in time with other values measured at different points in time. For example, a student may wish to compare book price in 2005 with prices in previous years. A common procedure for making relative comparisons is to begin by determining a base period index to which all other data values can be compared. This kind of index is called a price index for a single item. To form a price index, one time period is chosen as a base and the price for all other periods are expressed as a percentage of the base period price. If we denote the price in the base period by , and the price in another period by , then, the price index for the another period is

For example, the price of the house in 2001 was $73.000 and in 2004 the price was $121.000. If we take 2001 as a base period, then and . The price index is

It means that the price of house increased by 65.75% in 2004 compared with 2001.

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