INDEX NUMBERS

Index numbers are statistical devices designed to measure the relative changes in the level of a phenomenon (variable or a group of variables) with respect to time, geographical location or other characteristics such as income, profession, etc.

Uses of Index Numbers

Index numbers as Economic Barometers:

Index numbers are indispensable tools for the management personnel of any organisation or individual business concern and in Business planning , formulation of decisions. The indices of price- wholesale and retail Output- volume of trade, imports and exports Foreign exchanges and reserves, etc., throw a light on the nature and variations in general economics and business activities of the country.

Measures the pressure of economic and business behaviour.

Studying Trends and Tendencies:

Since they study the relative changes in level of phenomenon at different period of time, they are helpful in studying the different Trends or group of phenomena in a time series data . Helps to study various components of time series such as : Secular trend Seasonal and cyclical variations and Reflects upon general trend of production and business activity Can be used to forecast future events.

Helps in formulating decisions and policies:

Efficient planning and formulation of executive decisions Ex- Cost of living index numbers are used by the government and industrial and business concerns for the regulation of dearness allowance. Or Grant of bonus to the workers so as to enable them to meet the increased cost of living from time to time

Measures the purchasing power of money:

Helps us in computing real wages which are obtained on dividing the money wages by corresponding price index and multiplied by 100. Real wages helps us in determining the purchasing power of money

Ex- the cost of living index for any year (1979) for a particular class of people with base year (1970) is Rs.150. if any person belonging to that class gets Rs.300 in 1970 , then in order to maintain the same standard of living his salary in 1979 should be (150100)300= Rs.450. In other words , if a person gets Rs.450 in 1979 , then the real wages are (450150)100= Rs.300 i.e the purchasing power of money has reduced to 2/3.

Index numbers are used for Deflation:

Technique of obtaining real wages from the given nominal wages can be used to find the real income from the inflated money income Real sales from nominal sales

Thank you