Index Number

Introduction Index Numbers were originally developed to

measure the change in the price level.

Index numbers are described as “economic barometers”

The word economic barometer used by the economist, businessmen, and the policy markers etc. To measure the trends and changes in the economy.

Definition“Index Numbers are devices for measuring differences in the magnitude of a group of relative variable”

Types of Index Numbers1.Price index a) Wholesale price index number: Measure the general price

level of goods traded in the wholesale market.

b) Retail Price index Number: Measure the change in the retail prices of various commodities e.g. index numbers of bonds, securities, price, consumer price index numbers etc.

c) Cost of living index number: Measure the change in the cost of living of different classes of the people over a period of time.

2. Quantity Index: It measures the

relative changes in the quantities of agricultural and industrial goods produced over a period of time.

3. Special purpose index numbers: These are constructed with some

specific purpose e.g. import-export, labour productivity, share price.

Importance of Index Number1. Index Number help in framing suitable policies:

e.g. wages policy, tax policy, dearness allowance decision etc.

2. Index numbers help in the study of trends and tendencies: e.g. changes in price level, agricultural and industrial production, import export etc.

3. Index numbers are economic barometer:

4. Index numbers can measure the value of money:

5. Index numbers help to adjust national income:

6. Index numbers helps sociologist and psychologists:

Limitations of index Numbers1. Based on samples

2. Bias in the data.

3. Misuse of index numbers

4. Defects of formulate

5. Changes in the economy

6. Qualitative changes

7. Arbitrary weights

8. Limited scope.