What Is an Adjustment Index?

An adjustment index is a mathematical adjustment made to a piece of data meant to render that data more reflective of actual circumstances. The index will essentially change the data according to some sort of benchmark statistic or real-world situation that might otherwise skew the results of the data. Once the adjustment index has been used, the resulting numbers should give an accurate rendering of the thing they are meant to measure. These indexes are used on everything from individual mortgages and life insurance policies to macroeconomic statistics like inflation and price indexes.

Statisticians and mathematicians generally believe that numbers can provide true insight on any situation. The only caveat with that belief is that a statistic is usually only as effective as the data used to compile it. If there are circumstances that might skew the data somewhat, any conclusions drawn from it could conceivably be faulty. Since that is the case, these numerical experts have come up with ways of taking into account circumstances that might be affecting the numbers. An adjustment index is intended to render important statistics in the most accurate manner possible.

One simple way of thinking of an adjustment index is to consider the way a handicap is used in golf. The handicap is essentially meant to even the playing field for golfers of all skills. It allows a novice to compete with an expert golfer by giving the novice a certain amount of strokes. In similar fashion, the world of sports betting uses odds and point spreads as ways of leveling out betting interests.

People are often affected by an adjustment index in their lives without being aware of it. Those homeowners who have adjustable rate mortgages may see the interest they pay each month rise and fall. This is because some benchmark interest rate is determining the individual rate paid by the homeowners. Life insurance policies often determine their rates by adjusting them as the policy-holders age and are at a greater risk of dying.

On a larger level, economists are likely to use an adjustment index to produce statistics that provide a true sense of certain economic factors. As an example, economic growth is often measured by Gross Domestic Product, or GDP, and is measured in terms of how it is rising or falling from year to year. Since excess inflation would dampen the effects of economic growth, an index is used to factor inflation into the GDP, producing what is known as the Real GDP. Indexes are used in similar fashion whenever mitigating circumstances might alter key economic measurements.