In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices (index, plural) track economic health from different perspectives. Influential global financial indices such as the Global Dow, and the NASDAQ Composite track the performance of selected large and powerful companies in order to evaluate and predict economic trends. The Dow Jones Industrial Average and the S&P 500 primarily track U.S. markets, though some legacy international companies are included.[1] 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 GDP Deflator Index, or real GDP, measures the level of prices of all new, domestically produced, final goods and services in an economy.[2] Market performance indices include the labour market index/job index and proprietary stock market index investment instruments offered by brokerage houses.
Some indices display market variations that cannot be captured in other
ways. 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 (estimated: $3.57).
The least relatively expensive Big Mac price occurs in Hong Kong, at a 52%
reduction from U.S. prices, or $1.71 U.S. Such indices can be used to help
forecast currency values. From this example, it would be assumed that Hong Kong
currency is undervalued, and provides a currency investment opportunity.
Economists frequently use index
numbers when making comparisons over time. An index starts in a given year, the
base year, at an index number of 100. In subsequent years, percentage
increases push the index number above 100, and percentage decreases push the
figure below 100. An index number of 102 means a 2% rise from the base year,
and an index number of 98 means a 2% fall. n index number is an economic data
figure
reflecting price
or quantity compared with a standard or base value.[4][5]
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 economics,
index numbers generally are time series summarising movements in a group of
related variables. In some cases, however, index numbers may compare geographic
areas at a point in time. An example is a country's purchasing power parity. The best-known
index number is the consumer price index, which measures
changes in retail prices paid by consumers. In addition, a
cost-of-living index (COLI) is a price
index number that measures relative cost of living over time.[6]
In contrast to a COLI based on the true but unknown utility function, a
superlative index number is an index number that can be calculated.[6]
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.[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.