Final answer:
The DJIA is a price-weighted average of 30 stocks on the NYSE and NASDAQ, and higher-priced stock fluctuations disproportionately affect it. It's compared with the broader S&P 500 and Wilshire 5000 indices, and its narrow base makes its reliability as a standalone economic indicator questionable.
Step-by-step explanation:
Calculation and Significance of the DJIA
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 prominent companies listed on the NYSE and NASDAQ. To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, which is adjusted for stock splits and dividends to keep the index consistent.
Impact of Individual Stock Price Changes on the DJIA
Because the DJIA is price-weighted, changes in higher-priced stocks have a greater impact on the index's movement than changes in lower-priced stocks. This can lead to an unbalanced representation of the market if one stock's price change significantly.
Comparison to Other Stock Market Indices
The DJIA differs from other indices like the S&P 500, which is a market capitalization-weighted index of 500 companies, and the Wilshire 5000, tracking a larger selection of U.S. stocks. These indices may provide a more comprehensive representation of market trends compared to the DJIA's narrow focus.
Reliability of the DJIA as an Economic Indicator
While the DJIA is a widely recognized stock market indicator, its reliability as a sole economic gauge is debated. It only includes 30 companies, which may not sufficiently represent the entire economy or all sectors, thus potentially overlooking broader economic trends.