Meaning, Classifications, Construction and Uses of Index Numbers

Meaning, Classifications and Uses

Suppose we want to measure the general changes in the price level of consumer goods, the price changes are not directly measurable, as the prices of various commodities are in different units For example rice, wheat and sugar are in kilograms, milk, petrol, oil are in litres, clothes are in metres etc… Further, the price and quantity of some commodities may increase or decrease during the two time periods. Therefore, index number gives a single representative value which gives the general level of the prices of the commodities in a given group over a specified time period.

Definition 9.2

“An Index Number is a device which shows by its variations the Changes in a magnitude which is not capable of accurate measurements in itself or of direct valuation in practice”.

- Wheldon

“An Index number is a statistical measure of fluctuations in a variable arranged in the form of a series and using a base period for making comparisons”

– Lawrence J Kalpan

Classification of Index Numbers:

Index number can be classified as follows,

(i) Price Index Number

It measures the general changes in the retail or wholesale price level of a particular or group of commodities.

(ii) Quantity Index Number

These are indices to measure the changes in the quantity of goods manufactured in a factory.

(iii) Cost of living Index Number

These are intended to study the effect of change in the price level on the cost of living of different classes of people.

Uses of Index number

(i) It is an important tool for the formulating decision and management policies.

(ii) It helps in studying the trends and tendencies.

(iii) It determines the inflation and deflation in an economy.

Construction of Index Number

There are two types in construction of index number.

(i) Unweighted Index Number (ii) Weighted Index Number

We confine ourselves to Weighted Index Number.