Page 24 - Policy & Economic Report - June 2025

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Lessons from Economics

Indexing

Indexing, broadly, refers to the use of some benchmark indicator or measure as a reference or yardstick.
In economics, indexing is used as a statistical measure for tracking economic data such as inflation,
unemployment, gross domestic product (GDP) growth, productivity, and market returns. Indexing may
also refer to passive investment strategies that replicate benchmark indexes.

Types of indexes: -

• Economic indexes closely followed in the financial markets include the Purchasing Managers'
Index (PMI), the Institute for Supply Management’s Manufacturing Index (ISM), and
the Composite Index of Leading Economic Indicators. These indexes are tracked to measure
changes over time.

• Statistical indexes may also be used as a gauge for linking values. The cost-of-living adjustment
(COLA) is a statistical measure obtained through analysis of the Consumer Price Index (CPI) that
indexes prices to inflation.

• There could be a broad-based index that captures the entire market, such as the Standard &
Poor's 500 Index or Dow Jones Industrial Average (DJIA). The Dow Jones Industrial Average is a
price-weighted index, which means it gives greater weight to stocks in the index with a higher
price. The S&P 500 Index is a market capitalization-weighted index, which means it gives greater
weight to stocks in the S&P 500 Index with a higher market capitalization.

Advantages of index numbers: -

• Help in formulating policies-To make any policy related to the industrial or agricultural production,
the government refers to their respective index numbers.

• Help in study of trends- Index numbers help in the study of trends in variables like, export-import,
industrial, and agricultural production, share prices, etc.

• Helpful in forecasting- Index numbers not only help in the study of past and present behavior;
they are also used for forecasting economic and business activities.

• Facilitates comparative study- To make comparisons with respect to time and place especially
where units are different, index numbers prove to be very useful.

• Measurement of purchasing power of money to maintain standard of living- Index numbers, such
as cost inflation index help in measuring the purchasing power of money at different times
between different regions.

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