Index Number

TL;DR

A standardized measure for tracking how an economic or financial variable changes across periods.
Common examples include the Consumer Price Index (CPI) and stock market indices such as the Dow Jones Industrial Average (DJIA).
Used to compare different variables, identify trends and patterns, and inform decisions by policymakers and investors.

Definition

An index number is a statistical measure that represents the changes in a particular economic or financial variable over time. It is typically used to compare the current value of a variable with its value in a previous period, allowing for the analysis of trends and patterns.

Explanation

Index numbers provide a standardized and comparable way to express how a variable has changed over time. They compare current values to a base period value so that percentage changes and trends can be identified. Because they aggregate and normalize underlying data, index numbers enable comparisons across different variables (for example, different goods, services, or groups of stocks) and serve as concise indicators for economic and financial analysis. Policymakers and investors commonly use index numbers to gain insights into the state of the economy and financial markets and to support decision making.

Examples

Consumer Price Index (CPI)

The CPI measures changes in the prices of a basket of goods and services consumed by households. It is calculated by comparing the current prices of the goods and services with their prices in a base period and is often used as a measure of inflation. For instance, if the CPI for a particular year is 120, it means that the prices of the goods and services included in the basket have increased by 20% compared to the base period.

Stock Market Index — Dow Jones Industrial Average (DJIA)

A stock market index measures the performance of a group of stocks representing a particular market or sector. The Dow Jones Industrial Average (DJIA) tracks the performance of 30 large publicly-traded companies in the United States. The DJIA is calculated by taking the sum of the prices of the stocks included in the index, and dividing it by a factor known as the divisor. This index is often used as a measure of the overall health of the stock market, as a rising DJIA indicates that the stocks included in the index are performing well.

Use cases

Comparing the performance or price changes of different variables (for example, different goods, services, or groups of stocks).
Identifying trends and patterns in economic and financial data over time.
Supporting decisions by policymakers and investors through insights into the current state of the economy and financial markets.

Consumer Price Index (CPI)
Stock Market Index
Dow Jones Industrial Average (DJIA)