# price index

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Related to Calculating price indices: Laspeyres index, Paasche index

## Index

A statistical measure of the value of a certain portfolio of securities. The portfolio may be for a certain class of security, a certain industry, or may include the most important securities in a given market, among other options. The value of an index increases when the aggregate value of the underlying securities increases, and decreases when the aggregate value decreases. An index may track stocks, bonds, mutual funds, and any other security or investment vehicle, including other indices. An index's value may be weighted; for example, securities with higher prices or greater market capitalization may affect the index's value more than others. One of the most prominent examples of an index is the Dow Jones Industrial Average, which is weighted for price and tracks 30 stocks important in American markets.

## price index

1. a weighted average of the prices of a general ‘basket’ of goods and services produced in an economy over time, which is used in particular to indicate the rate of INFLATION. The RETAIL PRICE INDEX (RPI) is one commonly-used index, measuring the average level of the prices of final goods and services purchased by consumers. Each product in the index is weighted according to its relative importance in total consumer expenditure. A suitable base year is selected to commence the series (for example, index value 1990 = 100) and subsequent price changes are then reflected in changes in the index value over time (for example, 1999 = 200, indicating an annual rate of inflation of 10%). See INDEX-LINKED, PURCHASING POWER.
2. a weighted average of the prices of particular classes of financial securities or commodities, for example the Financial Times 100 share index or all-share index. See SHARE PRICE INDEX.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

## price index

a weighted average of the PRICES of selected goods, services, commodities or financial assets measured over time. One commonly used price index is the CONSUMER PRICE INDEX (CPI), which measures the average level of the price of a general ‘basket’ of goods and services bought by final consumers. Each item in the index is weighted according to its relative importance in total consumers’ expenditure. Starting from a selected BASE YEAR (index value = 100), price changes thereafter are reflected in changes in the index value over time. Thus, taking the example of the UK Consumer Price Index (CPI), the current CPI base year is 1996 = 100; in 2004 the index value stood at 111, indicating that retail prices, on average, had risen 11% between the two dates. Such price indices can be used to measure the rate of INFLATION and as a GNP DEFLATOR. Another commonly used index of price is the Wholesale Price Index, which records the price of a ‘basket’ of goods measured in terms of wholesale prices.

In similar fashion, a SHARE PRICE INDEX such as the Financial Times Stock Exchange ( FTSE) - 100 share index is used to measure change in the price of STOCKS and SHARES over time. The TERMS OF TRADE index is used to measure the average prices of EXPORTS relative to IMPORTS over time. See PURCHASING POWER, FAMILY EXPENDITURE SURVEY, TRADE WEIGHTED INDEX.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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