The main purposes of an index price are first to give a value useful to comparing economic quantities of various types, and then to measure the differences in those quantities over time. Thus, a number of different index numbers are developed specifically for such use. These are used in the calculation of certain variables such as consumer price index (CPI), the real estate price index (REOC), long term finance index (LTFI), and mortgage rate index (MRI). In addition, there are also other general index numbers, which are frequently used for general purposes.
One of the simplest and least intensive uses of index numbers is to calculate the change in price between specific dates. This can be done by dividing a monetary index by its base year and multiplying the result by the current prices. The base years here are usually the most recent prices. For example, if the index is based on the Purchasing Managers Index (PMI) for the month of December, then the following table gives the effect of changes in the index on various dates between that base year and today’s date.
The index numbers can also be used to compare two general prices, which are often referred to as the index basket and the index band. The index basket includes all items that are included in the standard price basket. The index band, on the other hand, consists of all items that are not included in the basket. This allows comparison of price changes across the basket and also across the index numbers.
While the index numbers can be used for broad comparisons across many types of units and products, they can also be used to specify specific units of measurement. For example, the United States dollar index, as a general price index, is usually used as a reference or yardstick for other quantities. The Dow Jones Industrial Average (DIA) is a similar measure that is often used. Other general price index sets, such as the yen index, are often compared against the dollar.
In addition to general price indexes, there are several specific ones that are based on particular time periods, such as the Dow Jones Industrial Average (DIA), or the Russell Volatility Index (RVIP). A particular index value index is determined by a specified base period price value index, which may be a range of one to thirty. For instance, the index of the Dow Jones Industrial Average is determined on a monthly basis, while the RVIP index is determined on a quarterly basis. Some specific price index options include the yield to maturity, spot, interest rate, and the Swiss franc index.
When it comes to constructing index numbers, there are several factors that need to be considered, including whether the prices that are used in the calculation are the closing prices at which they were traded. In doing this, you must remember that the index numbers are derived from opening prices, not sales prices, since sales price calculations typically include mark-up on stock quotes, as well as the tax component of the closing price, which can inflate the resulting index numbers, making them useless when it comes to comparisons with other metrics. If you are interested in constructing index numbers using an historical index, you will need to determine if the time period you are using has been stable or otherwise may be affected by price fluctuations. One way to ensure a good measure of price stability over a time period is to select an index that was based on market price data that was obtained prior to the index’s inception; that is, the index would have been established at a point in time when prices were more consistent than they currently are.
The next factor in constructing simple index numbers is to consider the information necessary to construct the indices in the first place. For instance, if you are interested in constructing simple index numbers to compare the performance of small and large-scale corporations, you will need to identify the industries in question and the companies within those industries to make sure that your comparisons are fair and accurate. You may also want to do this if you are interested in comparisons between economies of different size, or between parts of the world (or even between cities within a country).
One of the simplest ways to compare prices over time is to use the arithmetic mean of the quantities. The arithmetic mean of two quantities, say prices A and B, is the mid-point value of the corresponding closing price. This mid-point value is the all-important target price, since it is the price close enough to the target that you would expect to find the desired difference in prices if there were substantial movement in the prices. Another possible way to compare prices over time is to use a moving average, which is a line that best represents the average change in price of the index over time, graphed out on a log scale. Moving averages allow you to compare changes in price over periods of time longer than one day. In essence, the log of the index indicates the level of market volatility over a specific period of time.