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.
(4) Index numbers help to measures the Purchasing Power of money - Once the price index is computed, then the earnings of a group of people or class is adjusted with a price index that provides an overall view of the purchasing power for the group.
(5) Consumer price indices are used for deflating - The price index number is useful in deflating the national income to remove the effect of inflation over a long term, so that we may understand whether there is any change in the real income to the people or not.