INDEX NUMBER

​How do we know that the cost of living has gone up compared to the last year?.

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​Meaning

An Index number is a quantity which, by reference to a base period, shows by its variations, the changes in the magnitude over a period of time.
In general, index numbers are used to measure changes over time in magnitudes which are not capable of direct measurement.

​​Example 1

​​Example 2

​​Specialized Averages

​​Expressed in Percentage

​​Measure changes not capable of direct measurement

​​For Comparison

1. Measure the relative Change. 6. Wage Adjuster

2. Better for Comparison 7. Compare Standard of Living

3. Good Guides 8. Special Type Average

4. Economic Barometers 9. Formulating Policies

5. Pulse of Economy 10. Measure Purchasing Power

​Compares prices for a group of commodities at a certain time or place with prices of a base period.
WPI & CPI

​​Price Index

Study the changes in the volume of goods produced or consumed.
Output of Economy

​​Qunatity Index

​Compares total value of certain period with total value of base period.
Profit indices, Sales Indices

​​Value Index

Gudelines in Construction of Index Numbers

1. Purpose or Object

2. Selection of Base

   1. Fixed Base

   2. Average Base

   3. Chain Base

3. Selection of Commodities

4. Source of Data

5. Selection of Averages

6. Weighting

   1. Implicit weighting

   2. Explicit weighting