0
$\begingroup$

I was trying to understand inflation calculations when i came across this Scenario, they are trying to calculating the 12 month inflation rate , but the weighted figures given(essentially percentage multipliers ), both have a base year of 2002 .

So when trying to calculate the 12 month inflation rate over that period they found the percentage change between the two weighted figured ,while this is correct ,mathematically i dont understand how this works as in this isnt something that would intuitively come to me and i still dont logically understand why this actually works and shows the percentage change in between in actuall prices between these 2 points in time .

If someone could layout a step by step mathematical working out, as to why this make sense , id be grateful as im really trying to visualise what happens to "proportionality" here for this method to work ,as i completely lost track.

$\endgroup$

1 Answer 1

0
$\begingroup$

When creating any index the base year is just year of which quantity is used to divide all other quantities. Hence general formula for index number for a random observation $X_i$ with base $n$ is simply:

$$Index = \frac{X_i}{X_n}$$

This sort of transformation preserves the rates of change since:

$$\frac{\frac{X_t}{X_n}- \frac{X_{t-1}}{X_n}}{\frac{X_t}{X_n}} = \frac{X_t- X_{t-1}}{X_t} $$

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.