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What is the formula for calculating a simple index number?

Rationale

The current price divided by the base year’s price × 100.

This formula is used to calculate a simple index number, allowing for the comparison of price levels over time by expressing the current price as a percentage of the base year price. This method provides a clear and standardized way to assess changes in price levels.

A (The base year’s price divided by the current price) YOUR ANSWER

This choice provides a ratio that does not reflect how the price has changed in relation to the base year, as it inversely compares the base year price to the current price. This calculation does not yield a meaningful index number, which is intended to show growth or decline relative to a standard reference point.

B (The current price divided by the base year’s price × 100) CORRECT

This is the correct choice because it directly compares the current price to the base year price and scales it by 100 to express it as an index number. This formula effectively shows how much the price has changed relative to the base year, allowing for easy interpretation of inflation or price changes over time.

C (The current price divided by the base year’s price) YOUR ANSWER

While this choice provides a ratio of current to base prices, it fails to multiply by 100, which is necessary for converting the ratio into an index number format. As a result, it does not provide a percentage that is useful for economic analysis and comparison.

D (The base year’s price divided by the current price × 100) YOUR ANSWER

This option also inversely compares the base year price to the current price, which does not represent the increase or decrease in prices over time effectively. Similar to option A, this calculation cannot be interpreted as a meaningful index number for price comparison.

Conclusion

The formula for calculating a simple index number is essential for understanding price changes relative to a base year. By using the current price divided by the base year’s price multiplied by 100, one can accurately reflect the changes in price levels, facilitating economic analysis and decision-making. The other options either misrepresent the relationship or fail to convert the ratio into a usable index format.

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