Index (economics)

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In

Influential global financial indices such as the

. The Dow Jones Industrial Average and the S&P 500 primarily track U.S. markets, though some legacy international companies are included.^[2] The consumer price index tracks the variation in prices for different consumer goods and services over time in a constant geographical location and is integral to calculations used to adjust salaries, bond interest rates, and tax thresholds for inflation.

The

.

Some indices display market variations^{[definition needed]}. For example, the Economist provides a Big Mac Index that expresses the adjusted cost of a globally ubiquitous Big Mac as a percentage over or under the cost of a Big Mac in the U.S. in USD.^[4] Such indices can be used to help forecast currency values.^{[citation needed]}

Index numbers

An index number is an economic data figure reflecting price or quantity compared with a standard or base value.^[5][6] The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value. For example, if a commodity costs twice as much in 1970 as it did in 1960, its index number would be 200 relative to 1960. Index numbers are used especially to compare business activity, the cost of living, and employment. They enable economists to reduce unwieldy business data into easily understood terms.

In contrast to a cost-of-living index based on the true but unknown utility function, a superlative index number is an index number that can be calculated.^[1] Thus, superlative index numbers are used to provide a fairly close approximation to the underlying cost-of-living index number in a wide range of circumstances.^[1]

Some indexes are not time series. Spatial indexes summarize real estate prices, or toxins in the environment, or availability of services, across geographic locations. Indexes may also be used to summarize comparisons between distributions of data within categories. For example, purchasing power parity comparisons of currencies are often constructed with indexes.

There is a substantial body of economic analysis concerning the construction of index numbers, desirable properties of index numbers and the relationship between index numbers and economic theory.^{[citation needed]} A number indicating a change in magnitude, as of price, wage, employment, or production shifts, relative to the magnitude at a specified point usually taken as 100.

Index number problem

The index number problem is the term used by economists to describe the limitation of statistical indexing, when used as a measurement for cost-of-living increases.[7]

For example, in the Consumer Price Index, a reference year's "market basket" is assigned an index number of 100. In 2019 if a market basket price is 55 and the basket were to double the following year, in 2020, then the index would rise to 200. This is done by performing a simple calculation: Dividing the new year market basket price by the reference year's (otherwise known as the base year) price, and subsequently multiplying the quotient by 100.

While the CPI is a conventional method to measure inflation, it doesn't express how price changes directly affect all consumer purchases of goods and services. It either understates or overstates cost-of-living increases. This is the limitation of the CPI that is described as the index number problem.

There is no theoretically ideal solution to this problem. In practice for retail price indices, the "basket of goods" is updated incrementally every few years to reflect changes. Nevertheless, the fact remains that many economic indices taken over the long term are not really like-for-like comparisons and this is an issue taken into account by researchers in economic history.

See also

References

Further reading

• Robin Marris, Economic Arithmetic, (1958).

External links

Humboldt Economic Index Archived 2009-06-03 at the Wayback Machine S&P Indices Lars Kroijer

SG Index