Index Number

Topics: Inflation, Price index, Consumer price index Pages: 2 (483 words) Published: June 18, 2013
INDEX NUMBER

One particular type of descriptive measure that is useful in allowing comparisons of data over time is the index number. An index number is, in part, a ratio of a measure taken during one time frame to that same measure taken during another time frame, usually denoted as the base period. Often the ratio is multiplied by 100 and is expressed as a percentage. When expressed as a percentage, index numbers serve as an alternative to comparing raw numbers. Index number users become accustomed to interpreting measures for a given time period in light of a base period on a scale in which the base period has an index of 100(%). Index numbers are used to compare phenomena from one time period to another and are especially helpful in highlighting inter-period differences. Index numbers are widely used around the world to relate information about stock markets, inflation, sales, exports and imports, agriculture, and many other things. Some examples of specific indexes are the employment cost index, price index for construction, index of manufacturing capacity, producer price index, consumer price index, and index of output.

The motivation for using an index number is to reduce data to an easier-to-use, more convenient form. Using simple index numbers, the business researcher can transform these data into values that are more usable and make it easier to compare other years to one particular key year. The use of simple index numbers makes possible the conversion of prices, costs, quantities, and so on for different time periods into a number scale with the base year equaling 100%. One of the drawbacks of simple index numbers, however, is that each time period is represented by only one item or commodity. When multiple items are involved, multiple sets of index numbers are possible. Suppose a decision maker is interested in combining or pooling the prices of several items, creating a “market basket” in order to compare the prices for several years....