Why do we need an index number?
Why do we need an index number?
Index number enables us to calculate a single measure of change of a large number of items. The index numbers are needed for the following:
(i) Measurement of change in the price level - Index number measures the value of money during different periods of time as well as we can use it to know the impact of the change in the value of money on the different sections of society. It can be worked out to correct the inflationary and deflationary gaps in the system.
(ii) Information on foreign trade - Index of export and import provides useful information regarding foreign trade which helps in formulating the policies of export and import.
(iii) Calculating real wages - CPI is used in calculating the purchasing power of money and real wage as follows: (a) Purchasing power of money = 1/Cost of living index (b) Real wage = (Money wage/ Cost of living index) ×100
(iv) Measuring and comparing output - Index of Industrial Production (IIP) helps in comparing industrial output in different periods. Similarly, agricultural production index provides us with an estimate of the production in the agricultural sector.
(v) Policymaking of the Government - With the help of index numbers Government determines the monetary and fiscal prey and take necessary steps to develop the country.
(vi) Indicating stock prices - Sensex and NIFTY are index numbers of share prices on BSE and NSE respectively. They serve as a useful guide for investors in the stock market.
Index number enables us to calculate a single measure of change of a large number of items. The index numbers are needed for the following:
(i) Measurement of change in the price level - Index number measures the value of money during different periods of time as well as we can use it to know the impact of the change in the value of money on the different sections of society. It can be worked out to correct the inflationary and deflationary gaps in the system.
(ii) Information on foreign trade - Index of export and import provides useful information regarding foreign trade which helps in formulating the policies of export and import.
(iii) Calculating real wages - CPI is used in calculating the purchasing power of money and real wage as follows: (a) Purchasing power of money = 1/Cost of living index (b) Real wage = (Money wage/ Cost of living index) ×100
(iv) Measuring and comparing output - Index of Industrial Production (IIP) helps in comparing industrial output in different periods. Similarly, agricultural production index provides us with an estimate of the production in the agricultural sector.
(v) Policymaking of the Government - With the help of index numbers Government determines the monetary and fiscal prey and take necessary steps to develop the country.
(vi) Indicating stock prices - Sensex and NIFTY are index numbers of share prices on BSE and NSE respectively. They serve as a useful guide for investors in the stock market.
