Approach to Index Numbers

Pakistan Journal of Statistics and Operation Research, 2010

This study attempts to estimate the rate of inflation in Pakistan by the stochastic approach to index numbers by allowing systematic changes in relative prices. This approach provides not only point estimate but also confidence interval for the rate of inflation. There are two types of approaches to index number theory namely: the functional economic approaches and the stochastic approach. The attraction of stochastic approach is that it estimates the rate of inflation in which uncertainty and statistical ideas play a major roll of screening index numbers We use CPI data covering the period July 2001-March 2008 for Pakistan and find that if prices of individual commodities are widely dispersed then the level of uncertainty for measuring the rate of inflation will be very high. We find that the rate of inflation was changing significantly from month to month and by applying stochastic approach to index numbers we gained some level of confidence that our estimated range will contain the true parameter of the rate of inflation.

2010

The Pakistan Development Review

The answer to the question what is the mean of a given set of magnitudes cannot in general be found, unless there is given also the object for the sake of which a mean value is required. There are as many kinds of average as many purposes; and we may almost say in the matter of prices as many purposes as many writers." Edgeworth (1888). We estimate standard errors (S.Es.) of month on month and year on year inflation in Pakistan based on data for the period of July 2001 to June 2010 using the stochastic approach as well as extended stochastic approach to index numbers. We develop a mechanism to estimate S.E. of period average headline inflation (rate) using these approaches. This mechanism is then applied to estimate S.Es. of 12-month average rate of inflation in Pakistan for July 2003 to June 2010. The systematic changes in the relative prices of different groups in the CPI basket for Pakistan are also estimated. The highest (positive) relative price inflation occurred in 'food, beverages and tobacco' group and the lowest (negative) for 'recreation and entertainment' group, during fiscal years 2001 to 2010.

MPRA Paper, 2010

The answer to the question what is the Mean of a given set of magnitudes cannot in general be found, unless there is given also the object for the sake of which a mean value is required. There are as many kinds of average as many purposes; and we may almost say in the matter of prices as many purposes as many writers." Edgeworth (1888)

2012

We estimate standard errors (S.Es.) of month on month and year on year inflation in Pakistan based on data for the period of July 2001 to June 2010 using stochastic approach as well as extended stochastic approach to index numbers. We develop a mechanism to estimate S.E. of period average headline inflation using these approaches. This mechanism is then applied to estimate S.Es. of 12-month average inflation in Pakistan for July 2003 to June 2010. The systematic changes in the relative prices of different groups in the CPI basket for Pakistan are also estimated. The highest (positive) relative price inflation occurred in 'food, beverages and tobacco' group and lowest (negative) for 'recreation and entertainment' group, during FY01 to FY10.

There are some volatile items in the consumer price index of Pakistan. It is important to identify and separate the core components from the consumer price index for policy implications. There are different methods adopted by different countries to identify persistent or core component. The reason for such difference in the method is the structure of the economy. This paper analyzes the non food and non energy, twenty percent, thirty percent and forty percent trimmed mean methods after computing them and investigates which measure is the most appropriate for finding the core component. Further this paper also finds out that whether or not the each measure satisfy the four properties of best measure of core inflation. The Core inflation is computed on the basis of weighted year on year and weighted consecutive month. Consumer price index basket of ninety two items from VOL 3, NO 10 below three suggesting platykurtic curve which means that mean is the most appropriate and efficient measure of core inflation. There was a decline in the average standard deviation confirming reduction of noise in the data on the basis of year on year as compare to basis of consecutive month's methods. Further this research finds out that all the methods satisfy the four properties of best measures of core inflation.

There are some volatile items in the consumer price index of Pakistan. It is important to identify and separate the core components from the consumer price index for policy implications. There are different methods adopted by different countries to identify persistent or core component. The reason for such difference in the method is the structure of the economy. This paper analyzes the non food and non energy, twenty percent, thirty percent and forty percent trimmed mean methods after computing them and investigates which measure is the most appropriate for finding the core component. Further this paper also finds out that whether or not the each measure satisfy the four properties of best measure of core inflation. The Core inflation is computed on the basis of weighted year on year and weighted consecutive month. Consumer price index basket of ninety two items from VOL 3, NO 10 below three suggesting platykurtic curve which means that mean is the most appropriate and efficient measure of core inflation. There was a decline in the average standard deviation confirming reduction of noise in the data on the basis of year on year as compare to basis of consecutive month's methods. Further this research finds out that all the methods satisfy the four properties of best measures of core inflation.

International Statistical Review, 2006

The stochastic approach is a new way of viewing index numbers in which uncertainty and statistical ideas play a central role. Rather than just providing a single number for the rate of inflation, the stochastic approach provides the whole probability distribution of inflation. This paper reviews the key elements of the approach and then discusses some previously overlooked links with Fisher's early work contained in his book The Making of Index Numbers. We then consider some more recent developments, including Diewert's well-known critique of the stochastic approach, and provide responses to his criticisms. We also provide a review of Theil's work on the stochastic approach, and present and extend Diewert's work on this topic within the context of the Country Product Dummy method which measures price levels internationally.

The Pakistan Development Review, 1983

2013

We propose a new method of permanently excluding relatively volatile commodities from CPI basket in Pakistan. This is achieved by making use of trimming approach on past data on monthly CPI changes to isolate a Relatively Stable Component of CPI (RSC-CPI) as a new measure of core inflation. This method ensures inclusion of both food and non-food commodities that show persistent price behavior in Pakistan. Three alternative core inflation series based on this new approach and four other core measures based on existing methodology have been evaluated. RSC-CPI based measures of core inflation are found to be the best in terms of desirable properties proposed by Marques et al (2003) for a core inflation measure and various relative performance indicators.