An index number is commonly used in the study of the economic status of a particular region. As mentioned, the index number defines the level of a variable relative to the level in a particular period span. These index numbers serve as a measure to study the change in the effects of all the factors that cannot be measured or estimated on a direct basis.
Thus, Index numbers occupy an important place due to their efficacy in measuring the extent of economic changes across a stipulated period. It helps to study such changes’ effects due to factors that cannot be directly measured.
Characteristics of Index Numbers
- It is a special category of average for measuring relative changes in such instances where absolute measurement cannot be undertaken
- The index number only shows the tentative changes in factors that may not be directly measured. It gives a general idea of the relative changes
- The method of index number measure alters from one variable to another related variable
- It helps in the comparison of the levels of a phenomenon concerning a specific date and to that of a previous date
- It is representative of a special case of averages, especially for a weighted average
- Index numbers have universal utility. The index that is used to ascertain the price changes can also be used for industrial and agricultural production.
Types of Index Numbers
Various types of index numbers have particular usage. We will study the types of Index numbers to know the same. This section which is related to the types of Index numbers will help the students to understand the importance of each type regarding the task which is practiced for.
- Value Index: A value index number is formed from the ratio of the aggregate value for a particular period with that of the aggregate value that is found in the base period. The value index is utilized for inventories, sales, and foreign trade, among others.
- Quantity Index: A quantity index number is used to measure changes in the volume or quantity of goods that are produced, consumed, and sold within a stipulated period. It shows the relative change across a period for particular quantities of goods. The index of Industrial Production (IIP) is an example of a Quantity Index.
- Price Index: A price index number is used to measure how price alters across a period. It will indicate the relative value and not the absolute value. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are major examples of a price indexes.
Uses of Index Number in Statistics
- It helps in measuring changes in the standard of living as well as the price level.
- Wage rate regulation is consistent with the changes in the price level. With the determination of price levels, wage rates may be revised.
- Government policies are framed following the index number of prices. This price stability inherent to fiscal and economic policies is based on index numbers.
- It gives a pointer for international comparison concerning different economic variables—for instance, living standards between two countries.