Index numbers are meant to study the change in the
effects of such factors which cannot be measured directly. According to Bowley,
“Index numbers are used to measure the changes in some quantity which we cannot
observe directly”. For example, changes in business activity in a country are
not capable of direct measurement but it is possible to study relative changes
in business activity by studying the variations in the values of some such
factors which affect business activity, and which are capable of direct
measurement.
Index
numbers are commonly used statistical device for measuring the combined
fluctuations in a group related variables. If we wish to compare the price
level of consumer items today with that prevalent ten years ago, we are not
interested in comparing the prices of only one item, but in comparing some sort
of average price levels. We may wish to compare the present agricultural
production or industrial production with that at the time of independence. Here
again, we have to consider all items of production and each item may have
undergone a different fractional increase (or even a decrease). How do we
obtain a composite measure? This composite measure is provided by index numbers
which may be defined as a device for combining the variations that have come in
group of related variables over a period of time, with a view to obtain a
figure that represents the ‘net’ result of the change in the constitute
variables.
Index
numbers may be classified in terms of the variables that they are intended to measure.
In business, different groups of variables in the measurement of which index
number techniques are commonly used are (i) price, (ii) quantity, (iii) value
and (iv) business activity. Thus, we have index of wholesale prices, index of
consumer prices, index of industrial output, index of value of exports and
index of business activity, etc. Here we shall be mainly interested in index
numbers of prices showing changes with respect to time, although methods
described can be applied to other cases. In general, the present level of
prices is compared with the level of prices in the past. The present period is
called the current period and some period in the past is called the base
period.
Index
Numbers:
Index
numbers are statistical measures designed to show changes in a variable or
group of related variables with respect to time, geographic location or other
characteristics such as income, profession, etc. A collection of index numbers
for different years, locations, etc., is sometimes called an index series.
Simple Index Number- A simple index number is
a number that measures a relative change in a single variable with respect to a
base.
Composite Index Number- A composite index number is a number that measures
an average relative changes in a group of relative variables with respect to a
base.
Uses of Index Numbers
The main uses of index
numbers are given below:
·
Index numbers are used
in the fields of commerce, meteorology, labour, industrial, etc.
·
The index numbers
measure fluctuations during intervals of time, group differences of
geographical position of degree etc.
·
They are used to compare
the total variations in the prices of different commodities in which the unit
of measurements differs with time and price etc.
·
They measure the
purchasing power of money.
·
They are helpful in
forecasting the future economic trends.
·
They are used in
studying difference between the comparable categories of animals, persons or
items.
·
Index numbers of
industrial production are used to measure the changes in the level of
industrial production in the country.
·
Index numbers of import
prices and export prices are used to measure the changes in the trade of a
country.
·
The index numbers are
used to measure seasonal variations and cyclical variations in a time series.
Nature of Index Number
· Index numbers are specified
average used for comparison in situation where two or more series are expressed
in different units or represent different items. E. g. Consumer price index
representing prices of various items or the index of industrial production
representing various commodities produced.
· Index number measure the net
change in a group of related variable over a period of time.
· Index number measure the effect of
change over a period of time, across the range of industries, geographical
regions or countries.
· The consumption of the index
number is carefully planned according to the purpose of their computation,
collection of data and application of appropriate method, assigning of correct
weightages and formula.
Types of Index numbers:
There are various types of index numbers, but in brief, we shall take
three kinds and they are
(a) Price Index, (b) Quantity Index and (c) Value Index
a) Price Index: For measuring the value of money, in general, price index is used. It
is an index number which compares the prices for a group of commodities at a
certain time as at a place with prices of a base period. There are two price
index numbers such as whole sale price
index numbers and retail price index numbers. The wholesale price index reveals
the changes into general price level of a country, but the retail price index
reveals the changes in the retail price of commodities such as consumption of
goods, bank deposits, etc.
b) Quantity Index: Quantity index number is the changes in the volume
of goods produced or consumed. They are useful and helpful to study the output
in an economy.
c) Value Index: Value index numbers compare the total value of a certain period with
total value in the base period. Here total value is equal to the price of
commodity multiplied by the quantity consumed.
Notation: For any index number, two time periods are needed for comparison. These
are called the Base period and the Current period. The period of the year which
is used as a basis for comparison is called the base year and the other is the
current year. The various notations used are as given below:
P1 = Price of current year P0 = Price of base year
q1 = Quantity of current year q0 = Quantity of base year
Problems in the construction of index numbers
No index number is an all-purpose index number. Hence, there are many
problems involved in the construction of index numbers, which are to be tackled
by an economist or statistician. They are:
1. Purpose of the index numbers
2. Selection of base period
3. Selection of items
4. Selection of source of data
5. Collection of data
6. Selection of average
7. System of weighting
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