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.
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.
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.
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