How is the productivity index calculated?

The productivity index is intended to measure how productivity has changed over time relative to a specific baseline or reference point, often referred to as the base year. This index allows businesses and analysts to track improvements or declines in productivity levels by comparing the productivity of a given year to that of the base year.

In this context, the formula that states the productivity index is calculated using the productivity of a specific year (year 1) divided by the productivity of the base year, and then multiplying by 100%, effectively expresses this relationship as a percentage. This calculation is useful for determining the relative change in productivity, offering a clear view of whether productivity has increased or decreased compared to a standard.

In contrast, alternative formulas provided in the other choices either compare current productivity to previous years without establishing a solid baseline, or use averages that do not directly reflect the specific changes relative to a base year, making those calculations less effective for the intended purpose of establishing a productivity index.