2003) and it is this which forms the shopping basket. 1999 is referred to as the base year since it is the quantities consumed in this year which are used to make up the shopping basket.

The cost of the basket in 1999 prices therefore works out as shown in Table 10.6 (using information from Tables 10.4 and 10.5). The final column of the table shows the expenditure on each of the four energy inputs and the total cost of the basket is 7948.3 (this is in £m, so altogether about £7.96bn was spent on energy by industry). This sum may be written as:

where the summation is calculated over all the four fuels. Here, p refers to prices, q to quantities. The first subscript (0) refers to the year, the second (i) to each energy source in turn. We refer to 1999 as year 0, 2000 as year 1, etc., for brevity of notation. Thus, for example, p01 means the price of coal in 1999, q12 the consumption of petroleum by industry in 2000.

We now need to find what the 1999 basket of energy would cost in each of the subsequent years, using the prices pertaining to those years. For example, for 2000 we value the 1999 basket using the 2000 prices. This is shown in Table 10.7.

Firms would therefore have to spend an extra £368m (8316-7948) in 2000 to buy the same quantities of energy as in 1999. The sum of £8316m may be expressed as 2p1iq0i, since it is obtained by multiplying the prices in year 1 (2000) by quantities in year 0 (1999).

Table 10.8 The cost of the energy basket, 1999-2003
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