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INDEX NUMBERS

Of the important statistical devices and techniques, Index Numbers have today become one of the most widely used for judging the pulse of the economy, although in the beginning they were originally constructed to gauge the effect of changes in prices. Today we use index numbers for the cost of living, industrial production, agricultural production, imports, exports, etc. Index numbers are the indicators that measure percentage changes in a variable (or a group of variables) over a specified time.

OBJECTIVES

• After completing this lesson, you will be able to:
• z describe the term index and appreciate its uses;
• z differentiate between a weighted and unweighted index;
• z construct and interpret a Laspeyer’s price index;
• z construct and interpret a Paasche’s price index;
• z construct and interpret a value index;
• z explain how the Consumer Price Index is constructed and interpreted;
• z explain how industrial production index is constructed; and
• z understand its limitations.

MEANING OF INDEX NUMBER
“An index number is a statistical measure, designed to measure changes in a variable or a group of related variables”.

“Index number is a single ratio (or a percentage) which measures the combined change of several variables between two different times, places or situations”.

Index Numbers express the relative change in price, quantity, or value compared to a base period.

An index number is used to measure changes in prices paid for raw materials; numbers of employees and customers, annual income and profits, etc. if the index number is used to measure the relative change in just one variable, such as hourly wages in manufacturing, it is referred to as a simple index.

An index number can also be used to measure changes in the value of the group of variables such as prices of a specified list of commodities. the volume of production in different sectors of industry, production of various agricultural crops, cost of living, etc.

It is referred to as a composite index. Index number measures the average change in a group of related variables over two different situations such as prices of a specified list of commodities.

The volume of production in different sectors of industry, production of various agricultural crops, cost of living, etc. the index number does not indicate that the change is uniform for all commodities or groups of related variables. used to calculate it.

It may be noted that in the case of, say, Price Index, the price of some of the items may be rising, while it is falling in other items. the price index will only indicate the average change in the price of a group of related commodities.

Conventionally, index numbers are expressed in terms of percentage. Of the two periods, the period with which the comparison is to be made is known as the base period.

The value in the base period is given the index number 100. Suppose the change in price in the year 2013 is measured in comparison to the year 2000, then 2000 becomes the base year and 2013 becomes the current year.

For Example, By saying that the price index for the year 2013 is 125, taking the base year like 2000, it means that there is an increase of 25% in the general price as compared to the corresponding figure for the year 2000. Price index numbers measure and permit comparison of the prices of certain goods. Quantity index numbers measure the
changes in the physical volume of production, construction, or employment