Difficulty: Easy

Average Score: 100%

What is the formula for calculating a simple index number?

Rationale

The formula for calculating a simple index number is the current price divided by the base year's price × 100.

This formula allows for the comparison of prices over time, expressing the current price as a percentage of the base year's price, which standardizes the measurement and facilitates analysis of inflation or price changes.

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

This option omits the essential multiplication by 100, which is necessary to convert the ratio into a percentage format. Without this step, the result would not represent an index number but merely a ratio, failing to convey the relative change in prices effectively.

B (The base year's price divided by the current price) YOUR ANSWER

This choice reverses the relationship and produces an inverse ratio. It would show how the current price compares to the base year's price but does not provide the correct perspective needed for an index number, which should reflect how current prices relate to the base period.

C (The current price divided by the base year's price × 100) CORRECT

This is the correct formula for calculating a simple index number. It effectively transforms the ratio of current price to base price into a percentage, allowing for meaningful comparisons over time.

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

Similar to option B, this choice presents an inverse relationship. While it includes the multiplication by 100, it fundamentally misrepresents the comparison needed for a simple index number by placing the base year's price in the numerator.

Conclusion

A simple index number is calculated using the formula that compares the current price to the base year's price and expresses it as a percentage. This method provides a standardized means of assessing price changes over time, with option C correctly reflecting this relationship. The other options fail to accurately represent the calculation or invert the necessary components, leading to incorrect interpretations of price indices.

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