What is Index Number ? Types and Uses of Index Number

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

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

What is Index Number ? Types and Uses of Index Number

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

Persons, schools, hospitals etc.

• Also measures the changes in the value of variables.

• Index numbers are know as Barometer of economic Activity.

Features of index Numbers:

• Index Numbers are specialised averages.

• Index Numbers are expressed in Percentages.

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

Types of Index Numbers :

Three type of Index Numbers.

Price Index Number

Quantity Index Number

Value Index Number

Special Purpose Index Number

1. Price Index Number:

Measure General changes in Price level.
Comparison between two time period.

Example: Inflation,consume 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 Production.

3. Value Index Number :

Value =Price ×quantity
Measures changes in value of variables in term of rupees.
Combines both price quantity.

4. Special Purpose Index Number:

With some special Purpose

Example: Labour productivity index, size 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

Imitations Of Index Number:

1. Provides relative changes only :

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

They cannot speak the truth as they are the only approximately 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. Manipulations are Possible:

Index numbers 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:

Index number is not completely True because its provide half information.

7. International Comparison Not possible:

Index number 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.

Uses of index Numbers:

1.Index numbers are dispensable too for the management:

They help in studying trends of various phenomena 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 trend, which is very important for future operation of any business of production activity.

4. To measure and compare Changes :

Index numbers 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 changes in the magnitude of a group of variables.

5.Index numbers 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.

Index numbers are 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. Index numbers helps in deflating various values :

The price index number 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 adjustments are possible only by the use of price index numbers and the process of adjustments , in a situation of rising prices, is known as deflating.

Some others uses in index number :

Measure of change in the price level or the value of money.
Knowledge of the change in standard of living.
Adjustments in salaries .
Useful to business community .
Information regarding Production.
Useful to politics.

Conclusion:

We all know that index number are very important .The index number used to measures types of agricultural, economics,imports exports , income ,prices etc.