Care must be taken, however, when using index numbers. The index

number always tells you the percentage change compared with the base

year, but when comparing an index number across non-base years, the

percentage change in the index number is not given by the absolute

difference in the values of the index number. For example, if you want to

know how much steel output changed from 2014 to 2016, we know from

Table 2-3 that the index number for steel output increased from 125.0 to

132.5. But this is not an increase of 7.5 percent. The percentage increase in

steel output is computed as

percent.

More Complex Index Numbers

Perhaps the most famous index number used by economists is the index

of average prices—the Consumer Price Index (CPI). This is a price index

of the average price paid by consumers for the typical collection of goods

and services that they buy. The inclusion of the word “average,” however,

makes the CPI a more complex index number than the ones we have

constructed here.

With what you have just learned, you could construct separate index

numbers for the price of beef, the price of bus tickets, and the price of

Internet packages. But to get the Consumer Price Index, we need to take

the average of these separate price indexes (plus thousands of others for

the goods and services we have ignored here). But it cannot be a simple

average. Instead, it must be a weighted average, in which the weight

assigned to each price index reflects the relative importance of that good

``

`(132.5−125.0)/125.0=7.5/125.0=0.06`