An index number is basically a number which measures relative changes of anything that can be stated numerically (eg. price, or quantity).

The method

One specified point of time or quantative level will be taken as a base (usually given the value of 100) and each subsequent measurement will be expressed as a number above or below that figure, to be determined by the percentage change during the interval; eg. the statement that the price of tobacco is 149 (base year 1975) means simply that since the base year tobacco has risen in price by 49%.

Applications and uses

In commercial practice and economics the most common index is the retail price index (RPI), which is intended to show movements in the general cost of living. This particular index, however, is also a weighted index, i.e. attention is paid to the fact that the effect of a rise in the price of one item may be greater, or less, than a rise in the price of another. The reason for this is that the two items represent quite different proportions of total living expenses; e.g. in an economy where rice is the staple diet a rise in the price of rice will have a far greater effect on the cost of living than an equally steep rise in the price of butter, for example.

Other well known indices are the Dow Jones Industrial Average index, the whosale price index, the index of wages and salaries and various volume indices connected with imports and exports.