Chapter 15

Time-Series and Forecasting

Stat-II

Karan thagunna Chap 16-1

 The Importance of Forecasting

 Governments forecast unemployment rates,

interest rates, and expected revenues from income
taxes for policy purposes
 Marketing executives forecast demand, sales, and
consumer preferences for strategic planning
 College administrators forecast enrollments to plan
for facilities and for faculty recruitment
 Retail stores forecast demand to control inventory
levels, hire employees and provide training

Karan thagunna Chap 16-2

 Common Approaches
to Forecasting

Common Approaches
to Forecasting

Qualitative forecasting Quantitative forecasting

methods methods
 Used when historical data
are unavailable Time Series Causal
 Considered highly
subjective and judgmental  Use past data to predict
future values

Karan thagunna Chap 16-3

 Time-Series Data

 Numerical data obtained at regular time intervals

 The time intervals can be annually, quarterly,
monthly, weekly, daily, hourly, etc.
 Example:
Year: 2006 2007 2008 2009 2010
Sales: 75.3 74.2 78.5 79.7 80.2

Karan thagunna Chap 16-4

 Time-Series Plot
A time-series plot is a two-dimensional
plot of time series data

 the vertical axis U.S. Inflation Rate

16.00
measures the variable 14.00
of interest 12.00
10.00
8.00
 the horizontal axis 6.00
corresponds to the 4.00
time periods 2.00
0.00
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Karan thagunna Chap 16-5
 Time-Series Components

Time Series

Trend Seasonal Cyclical Irregular

Component Component Component Component

Overall, Regular periodic Repeating Erratic or

persistent, long- fluctuations, swings or residual
term movement usually within a movements over fluctuations
12-month period more than one
year

Karan thagunna Chap 16-6

 Trend Component

 Long-run increase or decrease over time

(overall upward or downward movement)
 Data taken over a long period of time

Sales

Karan thagunna
Time Chap 16-7
 Trend Component
(continued)

 Trend can be upward or downward

 Trend can be linear or non-linear

Sales Sales

Time Time
Downward linear trend Upward nonlinear trend

Karan thagunna Chap 16-8

 Seasonal Component

 Short-term regular wave-like patterns

 Observed within 1 year
 Often monthly or quarterly

Sales
Summer
Winter
Summer
Winter Spring Fall

Spring Fall

Time (Quarterly)
Karan thagunna Chap 16-9
 Cyclical Component
 Long-term wave-like patterns
 Regularly occur but may vary in length
 Often measured peak to peak or trough to
trough
1 Cycle
Sales

Year
Karan thagunna Chap 16-10
 Irregular Component

 Unpredictable, random, “residual” fluctuations

 Due to random variations of
 Nature
 Accidents or unusual events
 “Noise” in the time series

Karan thagunna Chap 16-11

 Trend Analysis

Reasons for Studying Trends:

1. The study of secular trends allow us to
describe a historical pattern.
2. To project the past trend into future
3. To control the trend component allow us to
study the effect of remaining component.
In general there are the following kinds of trend
analysis:
 Linear Trend

 Nonlinear ( curvilinear)Trend
Karan thagunna Chap 16-12
 Linear Trend Forecasting

Estimate a trend line using regression analysis

 Use time (X) as the
independent variable:

Yˆ  a  bX

Karan thagunna Chap 16-13

 Use OLS to estimate the trend line: SALES = a + b
(YEAR) for the data below.

SALES
(thousands YEAR
XY X2 1 1
of dollars) (X)  XY   n  X Y 148   4515
(Y) b  5

6 1 6 1  n 
X 2

1
   X 2 1
55 -  15
2

5
13
 1.3
9 2 18 4

8 3 24 9 10

10 4 40 16 a  Y - b X  9 - 1.3 (3)  5.1

12 5 60 25
So the estimated trend line
45 15 148 55 is
Y 9 X 3 SALES  5.1  1.3 (YEAR)
 SALES
(thousands of dollars)

slope = 1.3
indicates that sales tend to
increase 1.3 thousand
dollars or $1300 per year.

5.1

0 1 2 3 4 5 6 7 8
YEAR
If the estimated trend SALES  5.1  1.3 (YEAR)
continues, what would expected
sales be in year 10?

SALES  5.1  1.3 (YEAR)  5.1  1.3 (10)

 18.1
 Translating, or Coding, Time

 The main purpose of coding is to transform

years into corresponding time values(X).
 For the odd years series, the mean year is
placed in the middle(hence we subtract each
year from the mean).
X X- X translated or code(x)
1989 1989-1991 -2
1990 1990-1991 -1
1991 1991-1991 0
1992 1992-1991 1
1993 1993-1991 2
 Translating, or Coding, Time
 For the Even years series, the mean year the
average of the middle two years.
 To avoid the fraction in the coding, we multiply
the fraction by 2.
X X- X (X –X)x 2 code(x)
1989 1989-1991.5 -2.5x2 -5
1990 1990-1991.5 -1.5x2 -3
1991 mean 1991-1991.5 -0.5x2 -1
1992 1992-1991.5
=1991.5 0.5x2 1
1993 1993-1991.5 1.5x2 3
 In Each Situation:

x=0

a=y–bx=y

1
 XY   n  X Y  
 XY  n X Y
b 
 X   n  X 
1  
 2


2 2
X 2
 n X
 

b
 XY
Karan thagunna X 2
 Nonlinear Trend
 Quadratic form is one type of a nonlinear model:
^
Y  a  bx  cx 2
x  coded values of the time var iables
 Least square coefficients, a,b and c can be
determined from the equations:
 Y  an  c x 2

 x Y  a x  c x
2 2 4

b
 xY
x 2

Karan thagunna Chap 16-20

 15-14
 Richard Jackson developed an ergonomically superior
computer mouse in 1989, and sales have been
increasing ever since. Data are presented in terms of
thousand mice sold per year.
year 1989 1990 1991 1992 1993 1994 1995 1996
Number 82.5 125.7 276.9 342.5 543.6 691.5 782.4 889.5
1. Develop a linear estimating equation
2. Develop a second degree estimating equation
3. Estimate the number of mice that will be sold in 1998, using both
4. If we assume the rate of increase of mouse sale will decrease soon, which
model would you perfer?

Karan thagunna
 Solution-a

Karan thagunna
Solution- b,c,d

Neither model fulfil

the assumption.
 Ex-15-17

 Environtech engineering, a company that

specializes in the construction of antipollution
filtration devices, has recorded the following
sales record over the last 9 years:.

year 1987 1988 1989 1990 1991 1992 1993 1994 1995
Sales(00000) 13 15 19 21 27 35 47 49 57
1. Develop a linear estimating equation
2. Develop a second degree estimating equation.
3. To the best of your knowledge, which model is favorite to the
market?

Karan thagunna
 Using the system of the equations:

Which?
Karan thagunna
 15.4 Cyclical variation

 Cyclical variation is the component of a time

series that tends to oscillate above and below
the secular trend line for periods longer than 1
year.

 We use residual method to identify the cyclical

variation.

Karan thagunna
 Cyclical Variation
 Residual Method - cyclical component of time series
data is identified by eliminating or averaging out trend
effects.
 If the data is an annual series, trend components are
removed by dividing the actual value (Y) by the
corresponding trend value( Yˆ ), then we multiply the
result by 100. The result is the measure of the cyclical
variation as a percent of trend.
Percent of Trend
Y
^
 100
Y
 Registrations
(Millions) X Y-hat Cyclical
1960 6.577 1 8.0568 81.633
1961 5.855 2 8.1255 72.057
1962 6.939 3 8.1942 84.682
: : : : :
: : : : :
1990 9.16 31 10.1177 90.534
1991 9.234 32 10.1863 90.651
1992 8.054 33 10.255 78.537

Cyclical index shows the

position of each Y value
Yˆ  7.988  .0687(1)  8.0568
relative to the trend line.
6.577
Cyclical var iation (1960)  (100)  81.633 New registrations were
8.0568
about 81.63% of the
expected for the year
1960.
 Relative Cyclical Residual
(Measure of the percent deviation from the trend line)

^
Y Y
^
 100
Y
Karan thagunna
 Registrations
(Millions) X Y-hat Relative Cyclical
6.577 1 8.0568 -18.367
5.855 2 8.1255 -27.943
6.939 3 8.1942 -15.318
: : : :
: : : :
9.16 31 10.1177 -9.466
9.234 32 10.1863 -9.349
8.054 33 10.255 -21.463

6.577  8.0568
Re lative Cyclical var iation (1960)  (100)  18.367
8.0568

For the year 1960, the actual registration was 18.367 percent
short of the expected registrations.
 Example 15-23
 Suppose you are the capital budgeting officer of a small corporation
whose financing requirements aver the last few years have been
Year 1989 1990 1991 1992 1993 1994 1995
Millions of $ required 2.2 2.1 2.4 2.6 2.7 2.9 2.8
The trend equation that best describes the above data is
^
Y  2.53  0.13x, where 1992 =0, and x units = 1 year

(a) Calculate the percent of trend for these data.

(b) Calculate the relative cyclical residual for these data.
(c) In which year does the largest fluctuation from trend occur, and is it the
same for both methods?
(d) As the capital budgeting officer, what would this fluctuation mean for
you and activities you perform?
Karan thagunna
 Solution:

Karan thagunna
 15.5 Seasonal variation

 We have three main reasons for studying

seasonal variation.
1. To establish the pattern of past changes.
2. To project the past pattern into future.
3. To eliminate the seasonal effect from the time
series.(why?)

One way of measuring seasonal

variation is called the Ratio to Moving
Average method.
 Calculating seasonal indices and seasonally adjusting a time
series

We specify the procedure for quarterly data, but the method

can be modified for other periods of time.
1. Calculate a four-quarter moving average.
2. Average two moving averages to get a centered moving average.
3. Divide the series by the centered moving average to get S x I .
4. Average S x I to get the (unadjusted) seasonal index.
(If there are enough years, drop the highest and lowest values before
averaging).
5. Calculate the adjustment factor by dividing 400 by the sum of the
unadjusted seasonal indices.
6. Multiply the adjustment factor by the unadjusted seasonal indices to
get the adjusted seasonal indices.
7. Divide the series by the adjusted seasonal indices to get the
seasonally adjusted series.
Example: For the following time series Y, calculate the seasonal indices and seasonally
adjust the series.

1 2 3 4 5 6 7 8

Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
1 III 9
1 IV 10
2 I 7
2 II 8
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
1. Calculate a four-quarter moving average. Each number is
entered in the table in the middle of the 4 numbers of which it
is the average.
1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
1 IV 10
2 I 7
2 II 8
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
2 I 7
2 II 8
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
2 II 8
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
11.5
3 II 12
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
11.5
3 II 12
13.5
3 III 15
3 IV 18
2. Average two moving averages to get a centered moving
average.
1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9 7.50
8.0
1 IV 10
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
11.5
3 II 12
13.5
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9 7.50
8.0
1 IV 10 8.25
8.5
2 I 7
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
11.5
3 II 12
13.5
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9 7.50
8.0
1 IV 10 8.25
8.5
2 I 7 8.50
8.5
2 II 8
8.5
2 III 9
9.0
2 IV 10
10.0
3 I 9
11.5
3 II 12
13.5
3 III 15
3 IV 18
 1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3
1 II 6
7.0
1 III 9 7.50
8.0
1 IV 10 8.25
8.5
2 I 7 8.50
8.5
2 II 8 8.50
8.5
2 III 9 8.75
9.0
2 IV 10 9.50
10.0
3 I 9 10.75
11.5
3 II 12 12.50
13.5
3 III 15
3 IV 18
3. Divide the series (Y = T x C x S x I ) by the centered moving
average (T x C) to get S x I . [Divide column 3 by column
5.]
1 2 3 4 5 6 7 8

series Y 4-qtr MA Centered 100*Y/CMA

Adjusted
Seasonally
year quarter (TxCxSxI) (T x C) 4-qtr CMA seas.
(T x C) (S x I) adj. series
1 I 3 indices

1 II 6
7.0
1 III 9
8.0
1 IV 10 7.50 120.0000
8.5
2 I 7 8.25 121.2121
8.5
2 II 8 8.50 82.3529
8.5
2 III 9 8.50 94.1176
9.0
2 IV 10 8.75 102.8571
10.0
3 I 9 9.50 105.2632
11.5 10.75 83.7209
3 II 12
13.5 12.50 96.0000
3 III 15
3 IV 18
 4. Average S x I to get the (unadjusted) seasonal
indices or the quarter averages.

1 2 6 To do this, we create a small table from

100*Y/CMA
columns 1, 2, and 6 of the big table.
year qtr (S x I)
1 I
1 II
1 III 120.0000
1 IV 121.2121 quarter
I II III IV
2 I 82.3529 year
2 II 94.1176 1 120.0000 121.2121
2 III 102.8571 2 82.3529 94.1176 102.8571 105.2632
2 IV 105.2632
3 83.7209 96.0000
3 I 83.7209
3 II 96.0000
3 III
3 IV
 4. Average S x I to get the (unadjusted) seasonal
indices (the quarter averages).

1 2 6 To do this, we create a small table from

100*Y/CMA
columns 1, 2, and 6 of the big table.
year qtr (S x I) Average the numbers in each column. (If there
1 I are enough years, drop the highest and lowest
1 II values before averaging. We don’t have
1 III 120.0000
enough years to drop any values in this
example.)
1 IV 121.2121 quarter
I II III IV
2 I 82.3529 year
2 II 94.1176 1 120.0000 121.2121
2 III 102.8571 2 82.3529 94.1176 102.8571 105.2632
2 IV 105.2632
3 83.7209 96.0000
3 I 83.7209
qtr. averages
3 II 96.0000 83.0369 95.0588 111.4286 113.2376
(unadj. seas. indices)
3 III
3 IV
 5. Calculate the adjustment factor by dividing 400 by
the sum of the quarter averages or unadjusted
seasonal indices.
1 2 6 The sum of the quarter averages is
100*Y/CMA 83.0369 + 95.0588 + 111.4286 + 113.2376 =
year qtr (S x I) 402.7619.
1 I So the adjustment factor is 400/402.7619 =
1 II 0.99314.
1 III 120.0000
1 IV 121.2121 quarter
I II III IV
2 I 82.3529 year
2 II 94.1176 1 120.0000 121.2121
2 III 102.8571 2 82.3529 94.1176 102.8571 105.2632
2 IV 105.2632
3 83.7209 96.0000
3 I 83.7209
qtr. averages
3 II 96.0000 83.0369 95.0588 111.4286 113.2376
(unadj. seas. indices)
3 III
3 IV
 6. Multiplying each of the quarter averages by
the adjustment factor, we get the adjusted
quarter averages or adjusted seasonal
1 2 6 indices.
100*Y/MA
year qtr (S x I)
1 I
1 II
1 III 120.0000
1 IV 121.2121 quarter
I II III IV
2 I 82.3529 year
2 II 94.1176 1 120.0000 121.2121
2 III 102.8571 2 82.3529 94.1176 102.8571 105.2632
2 IV 105.2632
3 83.7209 96.0000
3 I 83.7209
qtr. averages
3 II 96.0000 83.0369 95.0588 111.4286 113.2376
(unadj. seas. indices)
3 III adj. qtr. averages
82.4675 94.4070 110.6644 112.4611
3 IV (adj. seas. indices)
7. To get the seasonally adjusted series, put the adjusted
seasonal indices in the original table, ….
1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3 82.4675
1 II 6 94.4070
7.0
1 III 9 7.50 120.0000 110.6644
8.0
1 IV 10 8.25 121.2121 112.4611
8.5
2 I 7 8.50 82.3529 82.4675
8.5
2 II 8 8.50 94.1176 94.4070
8.5
2 III 9 8.75 102.8571 110.6644
9.0
2 IV 10 9.50 105.2632 112.4611
10.0
3 I 9 10.75 83.7209 82.4675
11.5
3 II 12 12.50 96.0000 94.4070
13.5
3 III 15 110.6644
3 IV 18 112.4611
7. …. and divide the series (column 3) by the adjusted
seasonal indices (column 7).
1 2 3 4 5 6 7 8
Centered
series Y 4-qtr MA 4-qtr MA
100*Y/MA Adjusted Seasonally
year quarter (TxCxSxI) (T x C) (T x C) (S x I) seas. indices adj. series
1 I 3 82.4675 3.64
1 II 6 94.4070 6.36
7.0
1 III 9 7.50 120.0000 110.6644 8.13
8.0
1 IV 10 8.25 121.2121 112.4611 8.89
8.5
2 I 7 8.50 82.3529 82.4675 8.49
8.5
2 II 8 8.50 94.1176 94.4070 8.47
8.5
2 III 9 8.75 102.8571 110.6644 8.13
9.0
2 IV 10 9.50 105.2632 112.4611 8.89
10.0
3 I 9 10.75 83.7209 82.4675 10.91
11.5
3 II 12 12.50 96.0000 94.4070 12.71
13.5
3 III 15 110.6644 13.55
3 IV 18 112.4611 16.01
 Ex-15-26
Year Spring Summer Fall Winter
1991 102 120 90 78
1992 110 126 95 83
1993 111 128 97 86
1994 115 135 103 91
1995 122 144 110 98
(a) Calculate a 4 –quarter Centered Moving Average.
(b) Find the percentage of actual to moving average for
each period.
© Determine the seasonal indices.
Karan thagunna
Karan thagunna
 Modified Sum 2.1172 2.4473 1.8319 1.5972
Modified Mean 1.0586 1.2236 0.9159 0.7986
Mean SUM = 1.0586+ 1.2236+ 0.9159+ 0.7986=3.9967
Normalization factor = 3.9967/4 = 0.999175
Seasonal index: Spring = 1.0586/0.999175 = 1.0595
Summer = 1.2246,
Fall= 0.9167, Winter = 0.7993

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 Chapter-16

Index Numbers

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 Index Numbers

 Index numbers allow relative comparisons

over time
 Index numbers are reported relative to a Base
Period Index

 Base period index = 100 by definition

 Used for an individual item or group of items

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 Simple Price Index

 Simple Price Index:

Pi
Ii   100
Pbase
where
Ii = index number for year i
Pi = price for year i
Pbase = price for the base year
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 Common Price Index Numbers

 Consumer Price Index (CPI)

 Producer Price Index (PPI)
 Stock Market Index Numbers
 Dow Jones Industrial Average
 S&P 500 Index
 NASDAQ Index

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 Index Numbers: Example
Airplane ticket prices from 1995 to 2003:
Index
Year Price (base year
= 2006)
2001 272 85.0 P2002 288
2002 288 90.0 I 2000   100  (100)  90
P2006 320
2003 295 92.2
2004 311 97.2
Base Year:
2005 322 100.6 P2006 320
2006 320 100.0 I 2006   100  (100)  100
P2006 320
2007 348 108.8
2008 366 114.4
P2009 384
2009 384 120.0 I 2009   100  (100)  120
P2006 320
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 Index Numbers: Interpretation

P 288  Prices in 2000 were 90%

I 2000  2002  100  (100)  90 of base year prices
P2006 320

P 320  Prices in 2006 were 100%

I 2006  2006  100  (100)  100 of base year prices (by
P2006 320
definition, since 2006 is the
base year)

P2009 384 Prices in 2009 were 120%

I 2009   100  (100)  120 
P2006 320 of base year prices

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 Aggregate Price Indexes
 An aggregate index is used to measure the rate
of change from a base period for a group of items
Aggregate
Price Index
numbers

Unweighted Weighted
aggregate aggregate
price index price index
numbers numbers

Paasche Index Laspeyres Index

numbers numbers
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 16.2 Unweighted
Aggregate Price Index
 Unweighted aggregate price index formula:
n

 i
P (t)
i = item

IU( t )  i1
n
 100 t = time period

P (0) n = total number of items

i
i1

IU( t ) = unweighted price index at time t

n

P
i 1
i
(t)
= sum of the prices for the group of items at time t
n

 i = sum of the prices for the group of items in time period 0

P (0)

i 1

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 Unweighted Aggregate Price
Index: Example
Automobile Expenses:
Monthly Amounts ($):
Index
Year Lease payment Fuel Repair Total (2006=100)
2006 260 45 40 345 100.0
2007 280 60 40 380 110.1
2008 305 55 45 405 117.4
2009 310 50 50 410 118.8

I 2009 
 P 2009
100 
410
(100)  118.8
P 2006 345
 Unweighted total expenses were 18.8%
higher in 2009 than in 2006
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 Weighted
Aggregate Price Index Numbers
 Laspeyres index  Paasche index
n n

P i
(t)
Q (0)
i P i
(t)
Q (t)
i
I 
(t)
L
i1
n
 100 I 
(t)
P
i1
n
 100
P
i1
i
(0)
Q (0)
i P i
(0)
Q (t)
i
i1

Q(i 0 ) : weights based on Q(i t ) : weights based on current

period 0 quantities period quantities

Pi( t ) = price in time period t

Pi( 0 ) = price in period 0
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 Topic Summary
 Learned about price index numbers and
differences between aggregated and
disaggregated index numbers

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