# simple aggregate price index

Part 1. Computation of Indices

Below is information on food items for the years 2000 and 2004.

Item 2000 2004

Price Quantity Price Quantity

Margarine (pound) $0.81 18 $0.89 27

Shortening (pound) 0.81 5 0.94 9

Milk (½ gallon) 1.44 70 1.43 65

Potato chips 2.91 27 3.07 33

A. Compute a simple price index for each of the four items. Use 2000 as the base period.

B. Compute a simple aggregate price index. Use 2000 as the base period.

C. Compute Laspeyresâ?? price index for 2004 using 2000 as the base period.

D. Compute Paascheâ??s index for 2004 using 2000 as the base period.

E. Determine Fisherâ??s ideal index using the values for the Laspeyres and Paasche indexes computed in the two previous problems.

F. Determine a value index for 2004 using 2000 as the base period.

Part 2. Convert Price Data to Indices

The following historical data obtained from the U.S Department of Energy (http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html) shows the yearly average regular conventional retail gasoline Price (US$ per Gallon) for the period 1990-2010.

Year Code Av. Regular Retail Gasoline Prices (US$ per Gallon)

1990 1 1.30

1991 2 1.10

1992 3 1.09

1993 4 1.07

1994 5 1.07

1995 6 1.10

1996 7 1.19

1997 8 1.19

1998 9 1.02

1999 10 1.12

2000 11 1.46

2001 12 1.38

2002 13 1.31

2003 14 1.52

2004 15 1.81

2005 16 2.24

2006 17 2.53

2007 18 2.77

2008 19 3.21

2009 20 2.31

2010 21 2.72

1. Determine the linear regression equation for the gasoline retail price (1990-2010).Using the equation, forecast the gasoline price for 2012, which is year 23 (1990 = Year 1).

2. Compute the gasoline retail price data to a moving average series using a 5-year interval. Draw the trendline for the moving average series. Explain the trend.

To compute the moving average, first, insert the original series in Excel Column A. Use Excel, Data Analysis, Moving Average function. Show the input range. Insert 5 for interval, show the output range next to the original series in column B. Check chart output box. You may also use Megastat, Time Series/Forecasting function, to compute the moving average.

3. Convert the gasoline retail price to a price index using the year 1990 as a base year (1990 = 100). Graph the data in line chart. What do the indices suggest about the rate of price inflation? Has the rate of inflation increased, decreased, or remained unchanged during 1990-2010?

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#### Solution Summary

Simple aggregate price index is depicted.