index number


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Index number

A way to standardize the price changes of goods that have much different prices. For example, a consumer price index might be represented by a shopping cart of goods. Suppose those goods cost $324. The index would begin by dividing by 3.24 and the initial value would be 100. One usually watches the percentage increases or decreases in the index. See: Consumer Price Index (CPI), Time series models

Base Value

An often arbitrary figure used as the initial value of an index. All future values of the index are comparisons against the base value. For example, suppose an index is formed in 2001 and its base value is 100. If the index is 150 in 2009, it means that its value is 50% higher in 2009 than it was in 2001. It is also called the index number. See also: Base Year.

index number

a single numerical value that reflects the relative size of a VARIABLE in the period under review compared with its size in some predetermined BASE YEAR. For example, a RETAIL PRICE INDEX takes the same sample of goods and services in each period and measures the average price of this typical basket of goods and services, showing this average price in the form of a single index number.

The base period of an index is, by convention, given an index number of 100. For the UK Retail Price Index, this period is (currently) 1987, and subsequent percentage changes commence from that year. In 2004 the Retail Price Index was 187, suggesting that retail prices have increased by 87% on average between 1987 and 2004.

Regardless of whether the index is in terms of price, volume or value, the principle of index numbers remains the same: to exhibit simply and concisely the measured change in a variable from one period to another. See PRICE INDEX, INDEXATION, INDEX-LINKED.

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Three approaches, namely, growth accounting approach, index number approach, and econometric approach are commonly used to measure TFP growth.
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Selvanathan and Selvanathan (2004) showed how recent developments in the stochastic approach to index number can be used to model commodity prices in OECD countries.
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Years ago, Irving Fisher(1) of Yale University, and, more recently, Erwin Diewert(2) of the University of British Columbia and his coauthors, studied the criteria that a superlative index number should meet.
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Although the microfoundations of money have been widely discussed (see, for example, Pesek and Saving, 1967; Fama, 1980; Samuelson, 1968; and Niehans, 1978), prior to Barnett (1978, 1980, 1981) only a few authors, including Chetty (1969), Friedman and Schwartz (1970), and Hutt (1963), had applied either microeconomic aggregation theory or index number methods to monetary assets.
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