Definition and Uses of Index Numbers

DEFINITION AND USES OF INDEX NUMBERS

Definition of Index Numbers

An Index Number is defined as a relative measure to compare and describe the average change in price, quantity value of an item or a group of related items with respect to time, geographic location or other characteristics accordingly.

In the words of Maslow “An index number is a numerical value characterizing the change in complex economic phenomenon over a period of time or space”

Spiegal defines, “An index number is a statistical measure designed to show changes in a variable on a group of related variables with respect to time, geographical location or other characteristics”.

According to Croxton and Cowden “Index numbers are devices for measuring differences in the magnitude of a group of related variables”.

Bowley describes “Index Numbers as a series which reflects in its trend and fluctuations the movements of some quantity”.

Uses of Index Numbers

The various uses of index numbers are:

Economic Parameters

The Index Numbers are one of the most useful devices to know the pulse of the economy.

It is used as an indicator of inflanationary or deflanationary tendencies.

Measures Trends

Index numbers are widely used for measuring relative changes over successive periods of time. This enable us to determine the general tendency. For example, changes in levels of prices, population, production etc. over a period of time are analysed.

Useful for comparsion

The index numbers are given in percentages. So it is useful for comparison and easy to understand the changes between two points of time.

Help in framing suitable policies

Index numbers are more useful to frame economic and business policies. For example, consumer price index numbers are useful in fixing dearness allowance to the employees.

Useful in deflating

Price index numbers are used for connecting the original data for changes in prices. The price index are used to determine the purchasing power of monetary unit.

Compares standard of living

Cost of living index of different periods and of different places will help us to compare the standard of living of the people. This enables the government to take suitable welfare measures.

Special type of average

All the basic ideas of averages are employed for the construction of index numbers. In averages, the data are homogeneous (in the same units) but in index number, we average the variables which have different units of measurements. Hence, it is a special type of average.