What is the role of indexes in the economy?


Economists frequently make comparisons between sets of data in time. For example, a macroeconomist might want to measure changes in the cost of living in the US during the five-year period. This is where the index numbers come. They allow for quick and easy comparisons on the definition of “base year” and zoom all the rest of the results this year.

The role of indexes

The main role of indices is to simplify complex comparisons. This is especially useful when comparing currencies, which have many different nominal values. Some countries even use indices of changes in state policy, such as adjustments of state benefits on the level of inflation.

The good thing about indexes is they can be changed at any unit of measurement. Economists can apply the methods of indexing prices, income, output, employment and unemployment, net exports, or inflation.

Understanding of the method indexes

Take the example of an economist tracking the changes in the value of life within five years. For example, the first year of the study in 2010, when he hypothetically expenses American family of four $33,125 to afford basic housing, food, clothing, utilities, gasoline and medical care.

Without context, that $33,125 number does not mean much. It is also a complex number,. If next year the average price increased to $34,781, it is not immediately obvious because of the exponential growth occurred.

Simple things, the economist changes $33,125 in the base number, which is usually set at 100. All the other figures are also reduced. In this example, the value in the two years varies from $34,781 to 1.05 or 5% more compared to the previous year.

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