1.1 An index is a ratio that measures change

The word "index" comes from Latin and means a pointer, sign, indicator, list or register. It is used in economics, anthropology, physics, mathematics, astronomy, and a number of other disciplines.

In economics, an index is a ratio that measures changes in price levels or values. It is used to describe how prices, costs, quantities, etc., change over time.

An index is typically expressed as per cent of a base value, which is always one hundred (100). The next time the value is measured, the observation is compared to this base period figure. The calculation is based on this formula:

If the price of a packet of coffee at base period (=_o) is 2.10 euros and its price goes up to 2.20 euros when it is measured at time _t , the index for the packet of coffee will be calculated as follows:

The index value 104.8 indicates the magnitude of the percentage change since base period: the price of the packet of coffee has gone up by 4.8 per cent.

Index values also allow us to compare the magnitude of different kinds of changes. Compared to the base period figures, index values provide a clearer picture of the relative magnitude of the differences. For example, it is immediately clear from the index values in the Table below that the consumption of alcohol has increased by six per cent, the consumption of tobacco has remained unchanged, the consumption of sugar has decreased by 10 per cent and the consumption of coffee has dropped by 5 per cent.

Consumption of selected foodstuffs and stimulants per capita in 1995 and 2000

Source: Statistical Yearbook of Finland 2002, Table 410