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Price indexing

Price indexing

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How can you tell how much of the price index is solely caused by inflation?

Price indexing

When I was young in the 1980s the smallest ice-cream cost 2 krona. When I was young in the 1960s, it cost 5 krona to get a hair cut in a barber shop. That's nothing. When I was young in the 1940s, a hotdog with ketchup was only 10 öre. Yes, it's hard to compare prices and values over time.

Partly because inflation causes money to lose value. And at the same time, technology develops, and some things become easier to make. While others become harder and more expensive to get. So how do you compare price levels over the time? Well, you create an index.

And that's what we'll do now. We start by choosing a product for which we have the information about its price for several years in the past. It might be a liter of milk, a liter of gasoline, or something else such that the price doesn't change much from year to year. is the price of a Big Mac hamburger for Here, for example, a number of years. The index we're creating is a Big Mac index.

In an index, we don't represent the price in krona and öre, but in relation to a base year. Here, we use 1986 as the base year, and we put our index as 100 for that year. The index has no unit. It's simply 100. When the index is 100 even, this means no change compared to the base year.

Then we calculate the change factor for each year in relation to the base year. We start with 1990. The change factor is the new price divided by the base years price. 24 divided by 16,50. That's 1,45.

Multiply that by 100 and you have the index. If the index is 100 in 1986, and the price increases by a factor of 1,45, the index in 1990 is 145, and we continue down the table. For every year, we take this year's price divided by the base year's price times a 100. This gives us the index for that year. Can you tell how index is closely related to both percent and change factor?

Now, we can make a nice graph for the index. From the graph, you can see that in 2014, a Big Mac was almost as 3 times as expensive as it was in 1986, in krona and öre. How much of this change is caused by inflation and how much is caused by other things? Do you feel like a Big Mac is more expensive or cheaper compared with how the cost of other things has changed? The Big Mac index doesn't tell you this, but you might be able to find other indices that can help you answer those questions.

The index is a handy way of comparing price changes over time. An index is calculated in relation to a base year, for which the index is 100. Take the price for a particular year, divide the base year's price, multiply by 100, and you get the index for that year.