Difficulty: Easy

Average Score: 89%

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 times 100.

This formula provides a way to express the current price in relation to a base year price, allowing for a straightforward comparison over time by normalizing the values to a percentage.

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

This is the correct formula for calculating a simple index number, as it converts the ratio of current to base year prices into a percentage format, making it easier to interpret changes in price levels.

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

While this calculation provides a ratio of current to base year prices, it does not convert this ratio into a percentage. Thus, it lacks the necessary context to understand the relative change in price effectively.

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

This option incorrectly reverses the order of the calculation, resulting in a value that represents how much the base price is relative to the current price, rather than indicating how current prices have changed since the base year.

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

Similar to option C, this choice also reverses the calculation, providing a percentage that shows the relationship of the base price to the current price instead of the required current-to-base-year relationship necessary for a simple index number.

Conclusion

To summarize, the correct formula for calculating a simple index number is to take the current price, divide it by the base year’s price, and multiply by 100. This method allows for an effective percentage comparison of price changes over time, while the other options either misrepresent the relationship or provide incomplete information. Understanding this calculation is essential for analyzing economic data and trends.

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