We're all familiar with index numbers. We encounter them every
day - perhaps in the form of the CPI or the PPI; or maybe in the
form of some index of production. The effective exchange rate is
an index that I'll be posting about in the near future. Share
price indices are also familiar, although the DJIA has some very
peculiar aspects to its construction that deserve separate
consideration on another occasion. The thing about an index
number is that it has only ordinal content. That's to say, if a
particular price index, say P, has a (unit-less) value of 110,
that number tells us nothing about the price level at all. It's
only when we compare two values of the same index - say, the
values in 2010 and in 2011 - that the numbers really mean
anything. If P = 100 in 2010 and P = 105 in 2011, then the
average price of the bundle of goods being measured by P has
changed (risen in this case) by 5% - not by $5 or some other
value. In other words, over time, or perhaps across regions, an
index number measures proporti