Index (economics)
Encyclopedia
In economics
and finance
, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices (index, plural) track economic health from different perspectives. Influential global financial indices such as the Global Dow, and the NASDAQ Composite
track the performance of selected large and powerful companies in order to evaluate and predict economic trends. The Dow Jones Industrial Average
and the S&P 500
primarily track U.S. markets, though some legacy international companies are included. The Consumer Price Index
tracks the variation in prices for different consumer goods and services over time in a constant geographical location, and is integral to calculations used to adjust salaries, bond interest rates, and tax thresholds for inflation. The GDP Deflator
Index, or real GDP, measures the level of prices of all new, domestically produced, final goods and services in an economy. Market performance indices include the labour market index/job index and proprietary stock market index
investment instruments offered by brokerage houses.
Some indices display market variations that cannot be captured in other ways. For example, the Economist provides a Big Mac Index that expresses the adjusted cost of a globally ubiquitous Big Mac as a percentage over or under the cost of a Big Mac in the U.S. with a U.S. dollar (estimated: $3.57). Norway prices reflect most relatively expensive Big Mac, at an 84% increase over U.S. prices, or $6.5725 U.S. The least relatively expensive Big Mac price occurs in Hong Kong, at a 52% reduction from U.S. prices, or $1.71 U.S. The Big Mac index is used to predict currency values. From this example, it would be assumed that Hong Kong currency is undervalued, and provides a currency investment opportunity.
Provider: Standard & Poor's
Provider: Russell Investments
Provider: Morgan Stanley Capital International
Provider: Bombay Stock Exchange
Provider: Reuters
Provider: Markit
Provider: Historic Automobile Group
figure
reflecting price
or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio
to the base value. For example, if a commodity
costs twice as much in 1970 as it did in 1960, its index number would be 200 relative to 1960. Index numbers are used especially to compare business activity, the cost of living, and employment
. They enable economists to reduce unwieldy business data into easily understood terms.
In economics
, index numbers generally are time series
summarising movements in a group of related variables. In some cases, however, index numbers may compare geographic areas at a point in time. An example is a country's purchasing power parity
. The best-known index number is the consumer price index
, which measures changes in retail prices paid by consumers. In addition, a cost-of-living index
(COLI) is a price index number that measures relative cost of living over time. In contrast to a COLI based on the true but unknown utility function, a superlative index number is an index number that can be calculated. Thus, superlative index numbers are used to provide a fairly close approximation to the underlying cost-of-living index number in a wide range of circumstances.
There is a substantial body of economic analysis concerning the construction of index numbers, desirable properties of index numbers and the relationship between index numbers and economic theory.
, the nature of goods in the economy changes over time as well as their prices. A price index constructed in 1950 using a standard basket of goods based on 1950 consumption would not well represent the prices faced by consumers in 2000, as goods in some categories are no longer traded in 2000, new categories of goods have been introduced, and the relative spending on different categories of goods will change drastically. Furthermore, the goods in the basket may have changed in quality.
There is no theoretically ideal solution to this problem. In practice for retail price indices, the "basket of goods" is updated incrementally every few years to reflect changes. Nevertheless, the fact remains that many economic indices taken over the long term are not really like-for-like comparisons and this is an issue taken into account by researchers in economic history
.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices (index, plural) track economic health from different perspectives. Influential global financial indices such as the Global Dow, and the NASDAQ Composite
Nasdaq Composite
The Nasdaq Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. ...
track the performance of selected large and powerful companies in order to evaluate and predict economic trends. The Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
and the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
primarily track U.S. markets, though some legacy international companies are included. The Consumer Price Index
Price index
A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...
tracks the variation in prices for different consumer goods and services over time in a constant geographical location, and is integral to calculations used to adjust salaries, bond interest rates, and tax thresholds for inflation. The GDP Deflator
GDP deflator
In economics, the GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy...
Index, or real GDP, measures the level of prices of all new, domestically produced, final goods and services in an economy. Market performance indices include the labour market index/job index and proprietary stock market index
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
investment instruments offered by brokerage houses.
Some indices display market variations that cannot be captured in other ways. For example, the Economist provides a Big Mac Index that expresses the adjusted cost of a globally ubiquitous Big Mac as a percentage over or under the cost of a Big Mac in the U.S. with a U.S. dollar (estimated: $3.57). Norway prices reflect most relatively expensive Big Mac, at an 84% increase over U.S. prices, or $6.5725 U.S. The least relatively expensive Big Mac price occurs in Hong Kong, at a 52% reduction from U.S. prices, or $1.71 U.S. The Big Mac index is used to predict currency values. From this example, it would be assumed that Hong Kong currency is undervalued, and provides a currency investment opportunity.
Indices
Provider: Dow JonesDow Jones & Company
Dow Jones & Company is an American publishing and financial information firm.The company was founded in 1882 by three reporters: Charles Dow, Edward Jones, and Charles Bergstresser. Like The New York Times and the Washington Post, the company was in recent years publicly traded but privately...
- Dow Jones Industrial AverageDow Jones Industrial AverageThe Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
Provider: Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
- S&P 500S&P 500The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
- S&P 400S&P 400The S&P 400 MidCap Index, more commonly known as the S&P 400, is a stock market index from Standard & Poor's.It covers roughly the mid-cap range of US stocks.-Investing:The following ETFs attempt to track this index and sub-indexes:*Index Fund: &...
- S&P 600S&P 600The S&P 600 SmallCap Index, more commonly known as the S&P 600, is a stock market index from Standard & Poor's. It covers roughly the small-cap range of US stocks, using a capitalization-weighted index...
- S&P 1500S&P 1500The S&P 1500, or S&P 1500 Composite Index, is a stock market index of US stocks made by Standard & Poor's. It includes all stocks in the S&P 500, S&P 400, and S&P 600.-Annual returns:-External links:* * *...
- S&P/ASX 200S&P/ASX 200The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange from Standard & Poor's...
- S&P/TSX Composite IndexS&P/TSX Composite IndexThe S&P/TSX Composite Index is an index of the stock prices of the largest companies on the Toronto Stock Exchange as measured by market capitalization. The Toronto Stock Exchange listed companies in this index comprise about 70% of market capitalization for all Canadian-based companies listed on...
- S&P Global 1200S&P Global 1200The S&P Global 1200 Index is a free-float weighted stock market index of global equities from Standard & Poor's. The index covers 31 countries and approximately 70 percent of global stock market capitalization...
- S&P Custom Group of indices
- S&P Leveraged Loan IndexS&P Leveraged Loan IndexS&P Leveraged Loan Indexes are market value weighted syndicated loan indexes based upon market weightings, spreads and interest payments. The S&P/LSTA Leveraged Loan Index covers the U.S. market back to 1997 and currently calculates on a daily basis. The S&P/LSTA Leveraged Loan 100 Index dates...
Provider: Russell Investments
- Russell 1000 Index
- Russell 2000 Index
- Russell 3000 Index
- Russell Midcap Index
- Russell Microcap Index
- Russell Global Index
- Russell Developed Index
- Russell Europe Index
- Russell Asia Pacific Index
- Russell Emerging Markets Index
Provider: Morgan Stanley Capital International
- MSCI World IndexMSCI WorldThe MSCI World is a stock market index of over 1,600 'world' stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is often used as a common benchmark for 'world' or 'global' stock funds....
- MSCI EAFE (Europe, Australasia, and Far East) IndexMSCI EAFEThe MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada...
Provider: Bombay Stock Exchange
Bombay Stock Exchange
The Bombay Stock Exchange is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange in Asia. The equity market capitalization of the companies listed on the BSE was 1.63 trillion as of December 2010, making it the 4th largest stock exchange in Asia and the 8th largest...
- BSE SENSEXBSE SensexThe Bombay Stock Exchange SENSEX also referred to as BSE 30 is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange...
Provider: Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
- Reuters-CRB Commodities IndexReuters-CRB IndexThe Thomson Reuters/Jefferies CRB Index is a commodity price index. It was first calculated by Commodity Research Bureau, Inc. in 1957 and made its inaugural appearance in the 1958 CRB Commodity Year Book....
Provider: Markit
Markit Group Limited
Markit Group Limited. is a global financial information services company with over 2,300 employees. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency...
- ABXAsset-backed securities indexThe ABX is a credit derivative swap contract that pools lists of exposures to mortgage backed securities.In January 2006, CDS Indexco and Markit launched ABX.HE, a subprime mortgage backed credit derivative index, with plans to extend the index to underlying asset types other than home equity loans...
- CDXCredit Default Swap IndexA credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardised credit security and may...
/ iTraxxItraxxiTraxx is the brand name for the family of credit default swap index products covering regions of Europe, Australia, Japan and non-Japan Asia. They form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of... - CMBX
Provider: Historic Automobile Group
Historic Automobile Group
The Historic Automobile Group International is a London based in the area of rare historic motorcars and collectors’ automobiles. HAGI is known for its classic car market indices, which have been , based on a proprietary market capitalization formula called “survivor weighting”.Founded in 2007...
- HAGI Top Index
Index numbers
An index number is an economic dataEconomic data
Economic data or economic statistics may refer to data describing an actual economy, past or present. These are typically found in time-series form, that is, covering more than one time period or in cross-sectional data in one time period Economic data or economic statistics may refer to data...
figure
Number
A number is a mathematical object used to count and measure. In mathematics, the definition of number has been extended over the years to include such numbers as zero, negative numbers, rational numbers, irrational numbers, and complex numbers....
reflecting price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio
Ratio
In mathematics, a ratio is a relationship between two numbers of the same kind , usually expressed as "a to b" or a:b, sometimes expressed arithmetically as a dimensionless quotient of the two which explicitly indicates how many times the first number contains the second In mathematics, a ratio is...
to the base value. For example, if a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
costs twice as much in 1970 as it did in 1960, its index number would be 200 relative to 1960. Index numbers are used especially to compare business activity, the cost of living, and employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
. They enable economists to reduce unwieldy business data into easily understood terms.
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, index numbers generally are time series
Time series
In statistics, signal processing, econometrics and mathematical finance, a time series is a sequence of data points, measured typically at successive times spaced at uniform time intervals. Examples of time series are the daily closing value of the Dow Jones index or the annual flow volume of the...
summarising movements in a group of related variables. In some cases, however, index numbers may compare geographic areas at a point in time. An example is a country's purchasing power parity
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
. The best-known index number is the consumer price index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
, which measures changes in retail prices paid by consumers. In addition, a cost-of-living index
Cost-of-living index
Cost of living is the cost of maintaining a certain standard of living. Changes in the cost of living over time are often operationalized in a cost of living index. Cost of living calculations are also used to compare the cost of maintaining a certain standard of living in different geographic areas...
(COLI) is a price index number that measures relative cost of living over time. In contrast to a COLI based on the true but unknown utility function, a superlative index number is an index number that can be calculated. Thus, superlative index numbers are used to provide a fairly close approximation to the underlying cost-of-living index number in a wide range of circumstances.
There is a substantial body of economic analysis concerning the construction of index numbers, desirable properties of index numbers and the relationship between index numbers and economic theory.
Index Number Problem
The "Index Number Problem" refers to the difficulty of constructing a valid index when both price and quantity change over time. For instance, in the construction of price indices for inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, the nature of goods in the economy changes over time as well as their prices. A price index constructed in 1950 using a standard basket of goods based on 1950 consumption would not well represent the prices faced by consumers in 2000, as goods in some categories are no longer traded in 2000, new categories of goods have been introduced, and the relative spending on different categories of goods will change drastically. Furthermore, the goods in the basket may have changed in quality.
There is no theoretically ideal solution to this problem. In practice for retail price indices, the "basket of goods" is updated incrementally every few years to reflect changes. Nevertheless, the fact remains that many economic indices taken over the long term are not really like-for-like comparisons and this is an issue taken into account by researchers in economic history
Economic history
Economic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...
.
See also
- Stock market indexStock market indexA stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
- Producer price indexProducer price indexA Producer Price Index measures average changes in prices received by domestic producers for their output. It is one of several price indices.Its importance is being undermined by the steady decline in manufactured goods as a share of spending....
- Price indexPrice indexA price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...
- Bureau of Labor StatisticsBureau of Labor StatisticsThe Bureau of Labor Statistics is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics. The BLS is a governmental statistical agency that collects, processes, analyzes, and...
- Dow Jones IndexesDow Jones IndexesDow Jones Indexes was formed in 1997 as an entity within Dow Jones & Co. It is now owned by the CME Group. It serves as the marketing name of CME Group Indexes, LLC. It produces, maintains, licenses and markets indexes as benchmarks and as the basis of investible products such as exchange traded...
- IndexationIndexationIndexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation....