INDEX NUMBERS

Average change in a group of related variables over a period of time

or space.
OR
It is an indicator of the level of a phenomenon at a specific point of
time in comparison with its level at some other point of time.I.no. may
be of varying price,production,imports,exports.cost of living etc.For
economists I.no. are of use at every stage of planning,policy making,
decision making etc.So I.no. are called “Economic Barometers”.Just
as barometers measure changes in atmospheric pressure,I.no. measure
changes occurring in economic field.Thus I.no. are the averages which
measure change occurring in the current period as compared to the
change occurring in the base period. Generally I.no. are expressed in
percentage.
I.no.can be calculated for a single commodity also.
If price of a comm. is Rs 5/- in base year & Rs8/- in current year then
P=(p1/p0).100 is the price relative which means price in the current year
is 160% of the price in the base year.Price relative is the price in the
current year expressed as a percentage of the price in the base year.
I.no. are of three types:
• Price I.no.: Indicate general level of prices of articles in the current
period as compared to that in the base period.
•Quantity I. No.:It measures the relative changes n the quantity levels of
goods consumed or produced such as agricultural 7 industrial
production,imports exports, between two periods.
• Value I.no.: It measures the relative changes in the total monetary
value of an item, such as inventories, sales etc. between two periods
Uses of I.no.
1. They are useful to the government in formulating policies regarding
economic activities such as taxation,imports exports etc.
2. I.nos. are useful in comparing variations in production,price,demand,
supply etc.
3. They help industrialists & businessmen in planning their activities
such as production of goods,their stock,costing,marketing etc.
4. Consume price I.no. are used for the fixation of salary & grant of
allowances to the employees.
5. They help to measure the purchasing power of money.
Limitations of index numbers.
1. While constructing I.no.,some representative items alone aare made
use of. The I.no. so obtained may not indicate the changes in the
concerned fields accurately.
2.A customs & habits change from time to time, the use of commodities
also vary. And so, it is not possible to assign proper weights to various
items.
3.Many formulae are used for the construction of I.nos. These give values
for the index.
4. There is ample scope for bias in the construction of I.nos. By altering the
price quotation or by improper selection of items, I.nos.can be
manipulated.
Steps in the construction of index numbers
1. Defining the purpose of I.no. 6. Selection of formula.
2. Selecting the base period.
3. Selection of items.
4. Obtaining price quotations.
5. Selecting the approproate system of weights.
Types of I.nos. I.nos.
unweighted weighted