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Watch this video lesson to learn what index numbers are. Learn how useful this statistical number is in the real world.

You will also see some index numbers that we use and probably hear every day.

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Index Number

Our world is full of statistics. Just turn on the news and you are bombarded with statistics. You might hear them say that the cost of goods has increased by 4 points from last year or you might hear them say that the stock market is down by 42 points. As it turns out, these numbers that you hear are index numbers, numbers used in statistics and economics to show changes in various fields.We have just mentioned two of these fields: stocks and cost of goods. Both of these fields are broad.

The stock market has numerous companies and the cost of goods includes the cost of many different unique items. What exactly does this index number mean then?

Uses

This index number is a useful number that helps us quantify changes in our field. It is easier to see one value than a thousand different values for each item in our field.Take the stock market, for example.

It is comprised of thousands of different public companies. We could, of course, look at the stock value of each of these companies to see how the companies are doing as a whole, or we can look at just one number, the stock index, to get a general feel for how the companies are doing.The same goes for the cost of goods. We could look at the cost of each item and compare it to its cost from last year.

But that would mean looking at the cost of millions of items. Or we could look at the cost of goods index, just one number, to see whether prices have increased or decreased over the past year.We can say that the index number is one simple number that we can look at to give us a general overview of what is happening in our field. Let’s take a look at two real world index numbers.

Dow Jones Industrial Average

The first is called the Dow Jones Industrial Average, DJIA for short. This is a stock index. It measures the performance of 30 large public companies in the United States.

These 30 companies are representative of companies in the whole of the United States and therefore, this index is mentioned in relation to how businesses in the United States are doing. If this index goes down, then that means companies in the United States are not doing well. If the index goes up, then that means businesses in the United States are doing well.On November 14, 2014, the Dow Jones industrial average gave a number of 17,634.74, down 18.

05 from the day before. This means that businesses in the United States did better the day before. If we keep looking back in time, we see that on March 6, 2009, the Dow Jones industrial average registered at 6,626.94.

Compared to 17,634.74, the index number on November 14, 2014, companies in the United States were not doing well at all back in 2009. Looking back in history, we see that during that year, there was a recession that hit. You can see how this index number reflects how American companies are doing.

Consumer Price Index

Another index that is used is provided by the Bureau of Labor Statistics.

It is called the Consumer Price Index. This index measures the cost of goods in the United States. It actually provides several different index numbers depending on how detailed or regional you want to get.

You can get an index number for cities by themselves or you can get the index number for the United States as a whole.This index number compares current prices of goods to the prices the goods were back in 1982. The index number in 1982 was 100. So if the current index number is 180, it means that prices have increased 80% since then, according to the Bureau of Labor Statistics.

If we look at this index for September 2014, we see that the index is at 243.623. This means that since 1982, prices of goods have increased by 143.623%.Looking at these index numbers gives us an idea of the kind of inflation that have been occurred over the years. Let’s take the cost of a television.

Back in 1982, if the television cost $100, then in 2014, the television will cost $100 + $100*1.43623 = $243.62, an increase of 143.623%.This index number gives us an overview of how the cost of goods have changed over time. It, of course, doesn’t give us the exact cost of a certain product, but it shows changes in prices over time.

It is much easier to refer to this number when talking about how the cost of goods are today as compared to a previous time.

Lesson Summary

What have we learned?We learned that index numbers are numbers used in statistics and economics to show changes in various fields. They are used to show how a certain field is doing when compared to a previous period. It shows how the field is either growing or declining. We mentioned two index numbers that are used in the real world. The first is the Dow Jones Industrial Average, a stock index that measures how well companies in the United States are doing.

The second, the Consumer Price Index, is a cost of goods index that measures how prices have changed over the years.

Learning Outcomes

When this lesson is finished, you should be able to:

  • Describe index numbers
  • Recall the purpose of an index number
  • Describe the two index numbers used for the stock market and the cost of goods

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