hi everybody index numbers are used a lot in economics whether it's for GDP data house prices productivity exchange rates inflation we like to use index numbers a lot why and how can we actually get index numbers this video is going to look at that well let's look at two reasons why we like index numbers in economics in economics there are a heck of a lot of ugly numbers look at GDP GDP could be 12 numbers long you know add decimal places even longer than that that is a horribly ugly number so yeah to make ugly numbers less ugly you can simplify it like that there are so many ugly numbers just like this number here 249 35.9 what a horrible number that is if that's house price average house prices in a year that's a horrible number to look at If instead of saying that we could just say well that number is 100 then my God life is much easier much nicer to look at 100 than this horrible number and the second reason why is because in economics we like to do things with data don't we we like to analyze data we like to make comparisons between data well index numbers can allow for quick and easy comparisons so we can see whether numbers are rising or numbers are falling that's very important and if we're looking at very large numbers even something as simple as that can be very difficult to do with index numbers much easier to look at that but also in economics we like to look at rates of change normally annual rates of change right so the annual rate of growth the annual rate of inflation the annual rate of growth of house prices the annual rate of growth of productivity we like to look at rates of change a lot percentage changes index numbers can make it very easy to calculate percentage changes as well so let's see how we can do both of those things looking at a random example I've picked on the right hand side here we're looking at house price data in the UK there are three years year one year two and year three and each figure here represents the average house price in the UK in that year what we want to do is to convert these ugly raw numbers in green into to index numbers well how do we do that the first thing we do whenever we want to make an index is we have to pick a Bas here we have to pick a Bas year and it doesn't matter what year we pick we can pick any year we just have to call it the base year I've said that year one here is going to be our base year and base years always have an index value of 100 why well we can understand that using our equation of how to convert a raw number to an index number an equation you have to know here well how do we do it well we take the raw number that we want to convert and we divide it by the raw number in the base year and then we multiply by 100 so let's take year one our base year why do base years always have an index value of 100 well the raw number is that in the base year divide by the Bas year raw value is going to be exactly the same number so it's going to be that divided by itself which is one multiplied by 100 is going to be 100 so the base here always has an index value of 100 sometimes you're to the base here in which case your life is easy sometimes you're not you have to work out from the the number 100 that that year is the base year but then using this equation we can convert year 2 and year three raw numbers into index numbers how do we do that well let's take year two so the raw number we want to convert is 255 55.9 divide by the base year RO number which is this number 249 35.9 multiply by 100 and two decimal places you'll get the number 102.4 n that's the index number in year two do the same thing for year three so we take this number number we divide it by that number and we multiply by 100 and to two decimal places you'll get 10 4.65 so that's stage one done we can convert ugly raw numbers into much nicer numbers to look at right here in Black these are our index numbers but as we say we like to make comparisons between data and often its rates of change so we can actually look at percentage changes between these numbers more simply we could look at whether the numbers are rising and very simply from these numbers we can see that average house prices are increasing year on year now we can maybe see that easily from the green but with some numbers in economics horrible numbers it might be difficult to even do that so yeah we can see that house prices are rising just looking at the black numbers very very simple to see but for percentage change we can do a very simple calculation using index numbers to remember your equation though to get a percentage change to work out a percentage change it's always the difference between two numbers divide by the original number the starting number and then multiply by 100 so if we want to look at the percentage change the rate of change of house prices in year 2 we can see that that number is 2.49% how do we do that well we take the difference between two numbers so the difference between 1 2.49 and 100 that's clearly 2.49 divide by the starting number which was 100 and then multiply by 100 and we're going to get 2.49 as a percentage change now maybe that one you could just see obviously from 100 it's just 2.49% but then between these two numbers apply the same formula the difference between the two divided by 1 or 2.49 Times by 100 you get 2.11% so it makes our life much easier when we're Computing much easier numbers than these horrible numbers which can be very long- winded so there you go that's how we use index numbers that's why they're very very useful in economics uh if you practice this very well you'll realize how simple this is hopefully now that clears up a lot of confusion that's out there within next numbers keep it simple and you'll Master it very important in economics thank you so much for watching guys I'll see you all in the next [Music] video