Simple Price/Quantity Index

An index is a measure, over a period of time, of the average changes in the values (usually either prices or quantities) of a group of items. It expresses the value now (i.e. the current value) as a percentage of the value at some previously fixed time called the base date.

Usually we deal in annual indices (plural of index), in which case the base date is the base year and is given the index 100.

A company makes wide use of index numbers to evaluate its trading position in relation to its competitors. It will also rely on national indices of prices, production, wages, sales, transport charges and share prices to provide a background against which decisions affecting the company can be taken.

Anyone concerned with labour must necessarily be interested in indices of hours of work, earnings, wage rates and retail prices.

Perhaps the most well-known index is the Retail Price Index (RPI) which measures the average level of a 'shopping bag' of approximately 600 of those goods and services which are most widely used by households in Britain. It is frequently used as a basis for national wage negotiation between management and unions. More about this later.

There are many indices in common use, each with its own strengths and weaknesses and we will study a few of these.