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Procedural Error in Index Construction
An economist is constructing a nominal wage index using the following data, with 2020 as the base year:
- 2020: Average weekly wage = $800, Index = 100.0
- 2021: Average weekly wage = $840
- 2022: Average weekly wage = $882
The economist calculates the 2022 index by comparing the 2022 wage directly to the base year wage ($882 is a 10.25% increase from $800) and sets the 2022 index to 110.25. While the final number may be correct, identify the fundamental procedural error in the economist's method and explain the correct, year-by-year process for arriving at the 2022 index.
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Figure 1.6: US Nominal Wage Index (2010–2022)
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