Question

What do you mean by index number? Explain the types and uses of index numbers.

Answer 1

Index numbers are meant to study the change in the effects of such factors or variable (or a group of variables) over a specified time, which cannot be measured directly.

Following types of index numbers are generally used:

i. Price Index Numbers: These index numbers show changes in the wholesale or retail prices.

ii. Quantity Index Numbers: These index numbers measure changes in the volume or quantity of goods.

iii. Aggregate Index Numbers: These index numbers are used to measure changes in a phenomenon like cost of living, industrial production etc. Such index numbers involve both quantities and prices of items appropriate to a given situation.

Use of Index Numbers:

• An index number is a device for measuring changes in a variable ora group of related variables.
• The index number of industrial activity enables us to study the progress of industrialization in the country.
• These cost of living index numbers show changes in the prices of goods generally consumed by people.
• Index number helps the Government to formulate its price policies.
• They are also used to evaluate the purchasing power of money.
• Index numbers are also being used for forecasting business and economic activities, business cycles etc.