Index numbers

Index numbers are statistical tools which are used to measure percentage
changes in a particular variable over a period of time.
Index numbers are know as economic barometers just like a barometer is used to
measure pressure of gases index numbers are used to measure pressures of
economic variables over a period of time

Characteristics
 Index numbers are a special type of average. mean, median and mode are
used to compare only those series which are expressed in the same units,
Whereas the index numbers can compare series expressed in different
units of measurement for eg. Milk in litre and wheat in kg
 Index numbers are expressed in percentage
 Index numbers are used to measure change in such economic variables
which are not capable of direct measuring such as general price level which
is a imaginary concept and is not capable of direct measurement
 Write importance
 averages such as mean median measure the absolute changes i.e. exact
change whereas index numbers are used measure the relative changes i.e.
The percentage changes in a variable is measured over a period of time.
 Index numbers can be used to create composite measures For example, an
index number that measures changes in the prices of goods and services
can be used to track inflation. Matlab hum index number ke inference se kuchh or bhi calculat

Types
The Consumer Price Index
WQI measures the average changes in prices of goods and services Which are
directly bought by the consumers
It includes the prices of consumer goods and finished goods not the capital
goods. And semi finished or raw materials. Write the imp of cpi i WQI for expanding
Wholesale price index
WQI measures the average changes in prices of goods and services at wholesale
level or at the general price level.
The WPI includes the price of goods such as raw materials, semi-finished and
finished goods, and commodities such as metals, chemicals, textiles etc.
Human development index
The Human Development Index (HDI) is a statistical tool that is used to measure
the achievements of countries in three key dimensions of human development:
health, education, and income. The HDI was developed by the United Nations
Development Programme. India ranks 132 out of 193 countries. it provides
valuable insights into the quality of life in different countries around the world.
Sensex
Sensex is the stock market index of the Bombay Stock Exchange (BSE) . It stands
for Sensitive Index. The index consists of the 30 largest and most actively traded
stocks on the BSE, representing various sectors of the Indian economy. The
Sensex is used as a barometer of the Indian stock market's overall health and is
considered one of the most widely tracked stock market indices in the world.
Gross Domestic Product (GDP) Deflator:
Measures the changes in the prices of all goods and services produced within a
country, including exports.
Producer Price Index (PPI):
Measures the changes in the prices of goods and services at the producer level,
before they are sold to consumers.

Importance of index numbers

Simplifying Data
Index numbers are used for simplifying complex data into simple number.
Through them we can measure change in prices of hundreds of items over time
by a simple number.
Compare Data
Index numbers are used for comparing various economic variables at different
point of time . For eg comparing prices of items. Purchasing power of consumers ,
value of money , production level , investment rates etc.
Providing benchmarks
Index numbers can provide benchmarks for performance of the economy. For
example, Sensex is used as a barometer of the Indian stock market's overall
health. Human development index ranking reflect the development of human
resource of different countries Poverty index .
Index numbers helps in measuring standard of living of people it could be
measured using literacy rate , HDI, poverty index etc.
It helps in measuring inflation level when the prices of goods increases wages
of workers needs to be adjusted accordingly
Index numbers helps identifying trends and patterns of economic variables for
eg if GDP of a country is continuously falling then it needs to boost investment.
These trends helps in forecasting future trends and helps in decision making
Helps in policy formulation
Index numbers such as CPI and GDP deflector helps government to determine
inflation level in the economy. Hence government can adjust it’s monetary policy
to maintain price stability , reduce Burdon of tax , launch social welfare schemes
etc.
By tracking changes in the price level of goods and services, businesses can make
informed decisions about their pricing strategies and production levels.
Helps in investment decisions
stock market indices provides a broad overview of market trends and patterns.
Investors can use this information to make decisions about which sectors or
industries to invest in and when to buy or sell securities . And risk associated with
a particular investment.
Problems in Construction of Index numbers
Purpose of index numbers
It should be clearly defined. As the steps in construction of index numbers starts
with it . if the purpKose is to measure inflation level then we used COI , GDP
deflector, but if the the purpose is to measure performance of stock market then
we use Sensex similarly if the purpose is to know level of human resource
development we use HDI.
Selection of the base year
The base period of an index number is the period of time against which the
comparisons are made A base period Can be a single year a average of a selected
years. A base period Must be a normal. By normal period we mean that. Which is
free from all sorts of abnormalities or random causes such as inflation deflation
strikes of labours war financial crisis floods femine earthquake Etc base. Should
not be too distinct in the past it should be at least 5 years prior to the current. BS.
Should be a period for which reliable figures are available when it is difficult to
choose one single year as the normal period and average of several years is
usually a better base
Selection of commodities
Its not feasible to include all commodities . The purpose of the index number
helps in determining the types of commodities. Full example if we are calculating
CPI then we should prices of consumer goods not use capital goods raw material
or semi finished goods. Selected commodities should represent the real habit
taste and custom of the people it should be of standard quality and easily
measurable.
Collection of Data
It should be collected from reliable and authentic sources. Methods , tools , of
collection of data should be carefully selected.
Assigning weights
The term weight refers to the relative importance given to the different
commodity. Under UnWeighted category of index numbers all the items are
given equal importance whereas under weighted category items are assigned
weights on the basis of their share in expenditure…
Selection of suitable average
General arithmetic mean , geometric mean are used for averaging in calculation
of index number for eg. Arithmetic mean is used for calculating weighted average
of price relative , simple average of price relative . GM for fisher Ideal index
number median and mode is not used due to their inbuilt limitations
Selection of appropriate formula
It should be selected on the basis purpose of index numbers……………

Limitations
Narrow scope
They are used for measuring Changes in quantitative variables only not the
qualitative variables .
Interpretation:
Index numbers can be difficult to interpret, especially for non-experts. The
meaning of an index number may not be immediately apparent, and different
users may interpret the same index number in different ways.
Base year bias:
Change in base years affects the value of index number moreover if the base year
is not carefully selected then the resulting index number may be biased.
Quality of data:
The accuracy of index numbers depends on the quality of the data used to
calculate them. If the data is incomplete or inaccurate, the resulting index number
may not accurately reflect changes in the variable being measured.
Weighting bias:
The weights assigned to different items in an index number can affect the
calculated index number. If the weights do not accurately reflect the importance
of each item in the variable being measured, the resulting index number may be
biased
Compositional changes:
If the composition of the items being measured changes over time, the resulting
index number may not accurately reflect changes in the variable being measured.
Taste habits preferences of people change over time hence the commodities
which were sold for higher prices in base year may be sold for lower prices
because it became outdated. Not due to deflation hence it may cause error in
index numbers. And gives fallacious conclusions.
International comparisons .
Different countries use different combinations of items , different base period
for hence comparisons at international level is difficult.
There are multiple index numbers each with a different purposes . A index
number for one purpose cannot be used for another purpose.
While preparing index numbers, quality of items is not considered. It may be
possible that a general rise in the index is due to an improvement in the quality of
a product and not because of a rise in its price.