Index Numbers Class 11 Economics

Index Number

Index numbers are statistical tools that measure changes in the magnitude of a group of related variables. They provide an overall indication of the trend in the diverging ratios from which they are derived. As defined by Croxton and Cowden, "Index numbers are methods of measuring differences in the magnitude of a set of related variables."

Methods of Constructing Index Numbers

Construction of Simple Index Numbers

There are two methods of constructing simple index numbers.
(i) Simple Aggregative Method: 

In this method, we use the following formula

Here, P₀₁ = Price index of current year
ΣP₁ = Sum of prices of the commodities in the current year
ΣP₀ = Sum of prices of the commodities in the base year

(ii) Simple Average of Price Relatives Method
This method involves calculating price relatives for each commodity and then finding the simple average of all the price relatives.
Price relatives, P₀₁ =
We can find out the price index number of the current year by using the following formula

Construction of Weighted Index Numbers

• Weighted Average of Price Relative Method
  This method involves dividing the weighted sum of the price relatives by the total sum of the weights. Goods are assigned weights based on their quantity in this method.
  Here, P01 = Index number for the current year in relation to the base year
  W = weigh
  R = price relative
• Weighted Aggregative Method 
  Under this method, different goods are accorded weight according to the quantity bought, therefore, suggested different techniques of weighting some of the well-known methods are as under
  

Some Important Index Numbers

Consumer Price Index: 

Wholesale Price Index

The Wholesale Price Index (WPI) is a significant index used in calculating inflation rates in a country. It reflects the price changes of a basket of wholesale goods and primarily focuses on goods traded between corporations, rather than those purchased by consumers. The primary purpose of the WPI is to track price trends that reflect the demand and supply of goods in manufacturing, construction, and industry. By monitoring such trends, the WPI aids in evaluating the macroeconomic and microeconomic conditions of an economy.

Index of Industrial Production

The Index of Industrial Production (IIP) is a monthly index published by the Central Statistical Organisation (CSO) that measures the performance of various industrial sectors in the Indian economy. It is a composite indicator of the level of industrial activity in the economy and reflects short-term changes in the volume of production for a basket of industrial products during a given period compared to a chosen base period.

Sensex

The Stock Exchange Sensitive Index (SENSEX), also known as the Bombay Stock Exchange (BSE), is the oldest stock exchange in India. It is a free-float, market capitalization-weighted index comprising 30 financially sound and established organizations listed on the BSE. These organizations, also known as blue-chip companies, are from various industries in India and are among the most successful and highest traded stocks. The SENSEX is used to track movements in the Indian stock market.

Human Development Index 

The Human Development Index (HDI) is a comprehensive measure that seeks to capture three crucial aspects of human development, namely access to education and knowledge, a reasonable standard of living, and good health and longevity. Essentially, the HDI is used to gauge the extent to which development has positively impacted the quality of life for humans.

Issues in the construction of index numbers

• Purpose of index number.
• Selection of base year.
• Selection of items.
• Selection of the prices of items.
• Selection of method of weighting.
• Selection of sources of data.
• Choice of an average.
• Choice of method.

Index numbers in economics

• To measure the purchasing power of money.
• Knowledge of change in the standard of living.
• Adjustment in salaries and allowances.
• Help in framing suitable policies.
• As economic barometers.