Statistics >> Index Numbers
An index number is a statistical measure which is designed to express changes in a variable or a group of related variables under two different situations. They are usually expressed in percentage form. The comparisons may be between the periods of time, between places or other characteristics.
We can also say that an index number is a number which indicates the level. of a certain phenomenon at any given time in comparison with the level of the same phenomenon at some standard time. They are constructed with reference to a base period and thus very useful in comparing changes over different time periods. For example if we say that index of a certain industry in 2004 was 125 with the base year 2000, it would imply that the production has increased by 25% in 2004 as compared to 2000. Such an index computed for only one item is called a univariate index. If we like to construct an index for the industrial sector as a whole, it will be a composite index because here a number of variables have to be combined.
A few definitions of index number are given, below:
1. A special type of average which provides a measurement of relative changes from time to time or from place to place". - Wesell and Willett.
2. "An index number is a stastical measure designed to show changes in a variable or group of related variables with respect to time geographical location or other characteristics such as income, profession-etc."-Spiegel
Uses of index numbers
The theory of Index Numbers is widely applied in economics and business. They serve the following purposes.
(i) Index numbers are very useful in studying trends of a series over a given period of time and thus facilitates forecasting.
(ii) Index numbers provide the basic criteria to make policies.
(iii) Index numbers help in measuring the purchasing power of money.
(iv) They are used in computing real wages through the process of deflating.
(v) Index numbers are Economic Barometers. Indices of prices, output, foreign exchange, bank deposits etc. act as barometers to find out ups and downs in the general economic conditions of a country. Barometers are used to measure atmospheric pressure and index numbers are called economic barometer as they measure the pressure of economic and business behaviour.
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