A diffusion index is a convenient system used to convert different survey responses into a single-figure reading. Diffusion indexes are typically used when surveys such as Purchasing Managers Index (PMI) surveys ask respondents to report whether a variable, such as their output or employment numbers, has risen, remained unchanged or fallen during the survey period in question.
Diffusion indices are calculated as follows:
INDEX = (Percentage of survey respondents reporting ëhigherí) *1.0 + (Percentage of survey respondents reporting ëthe sameí)*0.5 + (Percentage of survey respondents reporting ëthe sameí)*0.0
For example, if 100% of survey respondents reported ëhigherí the index would be 100 (i.e 100 *1.0). If 100% of survey respondents reported ëthe sameí the index would be 50 (i.e. 100 *0.5)
These indexes therefore vary between 0 and 100 with levels of 50.0 signaling no change on the previous month. Readings above 50.0 signal an improvement or increase on the previous month. Readings below 50.0 signal a deterioration or decrease on the previous month. The greater the divergence from 50.0 the greater the rate of change signaled.