A number which measures relative changes. It may be used with reference to price or quantity or anything which can be stated numerically. One specified point of time or quantitative 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 this figure, to be determined by the percentage change during the interval; e.g. the statement that the index of the price of barley is 158 (base year 1965) means that since that year barley has risen in price by 58 percent.
In commercial practice the most common index is the retail price index, which is intended to show movements in the general cost of living. This particular index is 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. This is because 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 jam. Other well known indices are the Financial Times Industrial Ordinary Share Index, the Wholesale Price Index, the Index of Wages and Salaries and various volume indices connected with imports and exports.
|Reference: The Penguin Business Dictionary, 3rd edt.|