What is an Index Number ?

Definition: Is a percentage ratio which measures the average change of several variabies between two different times places or situation.

Or

Is a measure which measure the changes in some quality which we cannot observe sisectly.

Meaning of index Numbers :

• Carli, an Italian Statistician, who constructed the first index number as Carly as 1764, to compare the prices of year 1750 with that of year 1500.

• An Index Number is a statistical device for measuring changer in the magnitude of group of related variables.

• It measures the changes with respect to time Geographical location or some other characteristics.

• The Comparison may be between categories such as Person, Schools, Hospitals etc.

• Alsomeasures the changes in the value of variables.

• Index Number are know as Barometer of economic Activity.

Features of index Numbers:

• Index Number are Specialized averages.

• Index Number are expressed in Percentages.

• It measures the effects of change in relation to time or place.

Types of Index Number

Three type :

1. Price Index Number

2. Quantity Index Number

3. Value Index Number

4. Special Purpose Index Numbers

1. Price Index Number:

Measure General Changes in Price level.

• Comparison between two time period.

Example : Inflation, Consumer Price Index, Wholesale Price Index.

2. Quantity Index Number:

• Volume Index Number

• Level Of Output/Physical Volume of Production in economics.

Example: Agriculture Production, Industrial Productions.

3. Value Index Number :

• Value = Price × Quantity

• Measures changes in value of variables in term of rupees.

• Combine both price quantity.

4. Special Purpose Index Number :

• With some special Purpose

Example: Labour productivity index, share price index.

• Human development Index, standard of living index.

Notations :

P0 = Price in Base Year

Q0 = Quantity in Base Year

P1 = Price in Current Year

Q1 = Quantity in Current Year

W = Weight assigned

Limitation of Index Number :

1. Provides relative changes only :

Index Number are only estimates of relative changes in various events.

They can’t speak the truth as they are the only appropriately indicators. They represent the generalized truth, which is obtained on the basis of average of all items. Hence, it does not apply to individuals units.

2. Lack of Perfect Accuracy :

Quite often, Index Number are based on samples items. i.e, each and every item is not considered.

If samples are inadequate or selected by erroneous method, index number is bound to give inaccurate results.

3. Difference Between Purpose and Methods of construction :

When an Index Number is constructed of a special purpose by a specific methods, then such index number will not be appropriate of all others purposes and situations.

4. Ignores Qualitative Changes :

While constructing the prices or production index numbers, no attention is paid to changes in the quality of the Product.

5. Manipulation are Possible :

It can be constructed in such a manner so that the desired results can be obtained.

Such a Manipulation can be done by Choosing a particular base year, a particular group of commodities, a specific set of prices etc.

6. No Completely True :

It is not completely True because it’s provide half information.

7. International Comparison not Possible :

It not provide international Comparison. Basic of calculate number is different of both economic so international Comparison not possible.

8. Difference Time :

Construction patterns is totally different to the current year pattern. So this is the also major problem in Index Number.

Index Number Statistics :

Simple Index Number:

Every commodity is given equal importance.

Weighted Index Number:
1. Weighted Aggriegative Methods
2. Weighted Average of Price relative Method

1. Weighted Aggriegative : Under weight index no along with the prices of current year and base year the quantity of both the year, was also given and this quantity will act as the weights for the respective years.

2. Weighted Average of Price Relative Method: There are three types of weighted average of price relative methods-
a. Laspeyers Methods
b. Paasches Methods
c. Fisher’s Methods

Uses Of Index Numbers :

1. Index Numbers are dispensable too For the Management: They help in studying trends of various phenomenon and these trends and tendencies are the bases on which many policy decisions are taken.
• They are also used in planning and formulating various government and business policies.

2. Index Numbers act as economics Barometers : They measure the pulse of an economy and act as a barometer to indicate fluctuations in general economics conditions of a country.

3. Helps in Studying Trends : Index Numbers are very useful in studying the trend or tendency of a series spread over a period of time.
• They help to find out the trend of exports, imports, industrial production, prices and a variety of other phenomena.
• They also help in forecasting the future trends, which is very important for future operation of any business of Production activity.

4. To measure and compare Changes :  It Helps in comparative changes in two variables.
• It is not possible to measure changes in absolute terms. But index numbers provide a relative measure to change in the magnitude of a group of variables.

5. Helps to measure purchasing Power : The value of money depends on its purchasing power and purchasing power of money depends on the prices of the commodities. The changes in Prices adversely affects the value of money.
• Helpful in finding out the intrinsic worth of money as contrasted with its normal worth. This helps in formulating the wage policy of the country.

6. Helps in deflating Various values : Help to adjust monetary figures of various periods for changes in Prices.
• In order to know the real change in national income, these figures must be adjustment are possible only by the use of price index numbers and the process of adjustment, in a situation of rising prices, is known as deflating.

7. Some others Uses :
• Measure of change in the price level or the value of money.
• Knowledge of the change in standard of living.