INTRODUCTION
An index number is a ‘relative number’ which expresses the relationship between two variables or two
groups of variables where one of the group is used as base
“An index number is a statistical measure designed to show changes invariable or a group of related
variables with respect to time, geographic location or other characteristics.” - Spiegel
“Index Numbers are devices for measuring difference in the magnitude of a group of related variables” -
Croxton and Cowden
“An index number is a statistical measure of fluctuation in a variable arranged in the form of a series and a
base period for making comparisons” - L.J. Kaplass
Index number is a statistical device designed to measure changes or differences in magnitudes in a variable
or group of related variables with respect to time, geographic location or other characteristics such as
income, profession etc.
When the variation in the level of a single item is being studied, the index number is termed. as univariate
index. But when the changes in average level of the number of items are being studied then collectively
this index number is termed as composite index number. Most index numbers are composite in nature.
7.1 USES OF INDEX NUMBER(1) Index Numbers are the economic barometers - According to G. Simpson & F. Kafta, “Index numbers
are one of the most widely used statistical devices..... They are used to take the pulse of the economy
and they have come to be used as indicators of inflationary or deflationary tendencies”
A barometer is an instrument that is used to measure atmospheric pressure. Index numbers are used to
feel the pressure of the economic and business behaviour, as well as to measure the change in general
economic conditions of a country. Index numbers are indispensable tools in planning and control and
both for government organisations and for individual business concerns.
(2) Index number helps in formulation of policy decisions - Index number relating to output (industrial
production, agricultural production),volume of imports and export, volume of trade, foreign exchange
reserve and other financial matters are indispensable for any government organisation as well as
private business concerns in efficient planning and formulating policy decisions.
(3) Index numbers reveal trends and tendencies - Index numbers reflect the pattern of change in the level
of a phenomenon. For example, by examining the index number for imports and export for the last 10
years, we can draw the trend of the phenomenon under study and can also draw conclusions.
Study Note - 7
INDEX NUMBERS
This Study Note includes
7.1 Uses of Index Numbers
7.2 Problems involved in construction of Index Numbers
7.3 Methods of construction of Index Numbers
7.4 Quantity Index Numbers
7.5 Value Index Number
7.6 Consumer Price Index
7.7 Aggregate Expenditure Method
7.8 Test of Adequacy of the Index Number Formulae
7.9 Chain Index Numbers
7.10 Steps in Construction of Chain IndexFUNDAMENTALS OF BUSINESS MATHEMATICS AND STATISTICS I 7.1