Scribd
Upload
98 views4 pages

Meaning and Concept of Index Numbers

This document provides an overview of index numbers. It defines an index number as a special average that helps compare the level of a group of related variables over different situations. Index numbers are used to measure changes in things like prices, production levels, and other economic indicators at regular intervals. There are three main types of index numbers: price indices, quantity indices, and value indices. Price indices compare price changes, quantity indices compare changes in quantities, and value indices measure the combined effects of price and quantity changes. Index numbers have various uses, including helping decision makers understand changes in real income, aiding in wage and policy decisions, and indicating changes in business and economic activity.

Uploaded by

Xee Shaun Ali Bhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
98 views4 pages

Meaning and Concept of Index Numbers

This document provides an overview of index numbers. It defines an index number as a special average that helps compare the level of a group of related variables over different situations. Index numbers are used to measure changes in things like prices, production levels, and other economic indicators at regular intervals. There are three main types of index numbers: price indices, quantity indices, and value indices. Price indices compare price changes, quantity indices compare changes in quantities, and value indices measure the combined effects of price and quantity changes. Index numbers have various uses, including helping decision makers understand changes in real income, aiding in wage and policy decisions, and indicating changes in business and economic activity.

Uploaded by

Xee Shaun Ali Bhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

BBA [Hons] 2nd Semester

Sub: Statistics
Topic : Index Number
Lecture Notes 1
Index Number Prepared & Compiledd by:
Prof. Ajay Kumar Ganguly

MEANING AND CONCEPT OF INDEX NUMBERS


When we talk that the general level of industrial production has registered an increase
of 4 per cent, it is obvious that we are referring to the production of all those items
that are produced by the industrial sector. However, production of some of these items
may be increasing while that of others may be decreasing or may remain constant. The
rate of increase or decrease and the units in which these items are expressed may
differ. For instance, cement may be quoted per kg, cloth may be per meters, cars may
be per unit etc. In such a situation, when the purpose is to measure the changes in
the average level of prices or production of industrial products for comparing over a
time or with respect to geographic location, it is not appropriate to apply the technique
of measure of central tendency because it is not useful when series are expressed in
different units or/and in different items.

It is in these situations, that we need a specialised average, known as index numbers.


These are often termed as ‘economic barometers’.
An index number may be defined as a special average which helps in comparison of the
level of magnitude of a group of related variables under two or more situations.

Index numbers are a series of numbers devised to measure changes over a specified
time period (the time period may be daily, weekly, monthly, yearly, or any other regular
time interval), or compare with reference to one variable or a group of related variables.
Thus, each number in a series of specified index number is:

a) A pure number i.e., it does not have any unit.


b) Calculated according to a pre-determined formula.
c) Generated at regular time intervals, sometimes during the same time interval at different
places.
d) The regular generation of numbers form a chronological series.
e) With reference to some specified period and number known as base period and base
number, the latter is always 100. For example, if the consumer price index, with base year
1996 is calculated to be 180 for the year 2003, it means that consumer prices have
increased by 80 per cent in 2003 as compared to the prices prevalent in 1996.

USES OF INDEX NUMBERS


Though originally the index number was developed for measuring the effect of change
in prices, today they have become indispensable for analyzing the data related to
business and economic activity. This statistical tool can be used in several ways as
follows:

1) Decision makers use index numbers as part of intermediate computations to


understand other information better. Nominal income can be transformed into real
income. Similarly, nominal sales into real sales & so on …, through an appropriate
index number. Consumer price index, also known as cost of living index, is arrived at for a
specified group of consumers in respect of prices of specific commodities and services
which they usually purchase. This index serves as an indicator of ‘real’ wages (or
income) of the consumers.
Index Number

For example, an individual earns Rs. 100/- in the year 1970 and his earnings increase to
Rs. 300/- in the year 1980. If during this period, consumer price index increases from
100 to 400 then the consumer is not able to purchase the same quantity of different
commodities with Rs. 300, which he was able to purchase in the year 1970 with his
income of Rs. 100/-. This means the real income has declined. Thus real income can be
calculated by dviding the actual income by dividing the consumer price index:

Real income in 1980 = Actual income in 1980


Consumer price index of 1980

300
= = Rs. 75 /− with respect to 1970 as base year.

400

Therefore, the consumer’s real income in the year 1980 is Rs. 75/- as compared to
his income of Rs. 100/- in the year 1970. We can also say that because of price
increase, even though his income has increased, his purchasing power has
decreased.
2) Different types of price indices are used for wage and salary negotiations, for
compensating in price rise in the form of DA (Dearness Allowance).
3) Various indices are useful to the Government in framing policies. Some of these
include taxation policies, wage and salary policies, economic policies, custom and
tariffs policies etc.
4) Index numbers can also be used to compare cost of living across different cities
or regions for the purpose of making adjustments in house rent allowance, city
compensatory allowance, or some other special allowance.
5) Indices of Industrial Production, Agricultural Production, Business Activity,
Exports and Imports are useful for comparison across different places and are
also useful in framing industrial policies, import/export policies etc.
6) BSE SENSEX is an index of share prices for shares traded in the Bombay
Stock Exchange. This helps the authorities in regulating the stock market. This
index is also an indicator of general business activity and is used in framing
various government policies. For example, if the share prices of most of the
companies comprising any particular industry are continuously falling, the
government may think of changes in its policies specific to that industry with a
view to helping it.
7) Sometimes, it is useful to correlate index related to one industry to the index of
another industry or activity so as to understand and predict changes in the first
industry. For example, the cement industry can keep track of the index of
construction activity. If the index of construction activity is rising, the cement
industry can expect a rise in demand for cement.
Index Number

CLASSIFICATION OF INDEX NUMBERS


There are three principal types of indices: price indices, quantity indices, and
value indices.

Price Indices: This type of indices is the most frequently used. Price indices
consider prices of a commodity or a group of commodities and compare changes of
prices from one period to another period and also compare the difference in price
from one place to another. For example, the familiar Consumer Price Index
measuring overall price changes of consumer commodities and services is used to
define the cost of living.

Quantity Indices: The major focus of consideration and comparison in these


indices are the quantities either of a single commodity or a group of commodities.
For example, the focus may be to understand the changes in the quantity of paddy
production in India over different time periods. For this purpose, a single
commodity’s quantity index will have to be constructed.
Alternatively, the focus may be to understand the changes in food grain production
in India, in this case all commodities which are categorized under food grains will be
considered while constructing the quantity index.

Value Indices: Value indices actually measure the combined effects of price and
quantity changes. For many situations either a price index or quantity index may
not be enough for the purpose of a comparison. For example, an index may be
needed to compare cost of living for a specific group of persons in a city or a region.
Here comparsion of expenditure of a typical family of the group is more relevant.
Since this involves comparing expenditure, it is the value index which will have to
be constructed. These indices are useful in production decisions, because it avoids
the effects of inflation.
Index Number

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy