Mathematically, a price index is a two-digit decimal number like 1.00 or 0.85 or 1.25. But—because some people have trouble working with decimals—the price index has traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125 when it's published. This means that when we deflate nominal figures to get real figures—by dividing the nominal by the price index—we also need to remember to divide the published price index by 100 to make the math work.
I had a little trouble with the "two-digit decimal number" thing. Their numbers have two decimal digits, or two decimal places, yeah. But none of those numbers has two digits, and they are definitely not "two-digit" numbers. But all of that was forgiven when I got to the second sentence:
But—because some people have trouble working with decimals—the price index has traditionally been multiplied by 100 ...I love the explanation.
Who works with price indexes? Economists, that's who. Is Khan saying economists have trouble working with decimals?
1 comment:
From Deflating Nominal Values to Real Values at the Dallas Fed:
"Common price indexes measure the value of a basket of goods in a certain time period, relative to the value of the same basket in a base period. They are calculated by dividing the value of the basket of goods in the year of interest by the value in the base year. By convention, this ratio is then multiplied by 100.
Generally speaking, statisticians set price indexes equal to 100 in a given base year for convenience and reference."
"For convenience and reference." I guess that's a little better than "because some people have trouble working with decimals".
But not much.
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