Page 219 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Unit 15 : Index Number–Introduction and Use of Index Numbers and their Types

Self-Assessment Notes

1. Fill in the blanks :
(i) Index numbers are .......... averages.
(ii) Historically the first index was constructed in .......... .
(iii) Theoretically the best average in the construction of index number is .......... .
(iv) The index numbers are descriptive measures or .......... .
(v) Index numbers are .......... of economic activity.
15.4 Summary

• Index numbers have become today one of the most widely used statistical devices. Though
originally developed for measuring the effect of change in prices, there is hardly any field
today where index numbers are not used. Newspapers headline the fact that prices are going
up or down, that industrial production is rising or falling, that imports are increasing or
decreasing, that crimes are rising in a particular period compared to the previous period as
disclosed by index numbers. They are used to feel the pulse of the economy and they have to be
used as indicator of inflationary or deflationary tendencies. In fact, they are described as
barometers of economic activity, i.e., if one wants to get an idea as to what is happening to an
economy he should look to important indices like the index number of industrial production,
agricultural production, business activity, etc.
• to obtain an average, items must be comparable; for example, the average weight of men, women
and children of a certain locality has no meaning at all. Furthermore, the unit of measurement
must be the same for all the items. Thus an average of the weight expressed in kg., lb., etc., has
no meaning. However, this is not so with index numbers. Index numbers are used for purposes
of comparison in situations where two or more series are expressed in different units or the
series are composed of different types of items.
• Index numbers are most widely used for measuring changes over a period of time. Thus we can
find out the net change in agricultural prices from the beginning of first plan period to the
Ninth plan period, i.e., 1997-2002. Similarly, we can compare the agricultural production,
industrial production, imports, exports, wages, etc., at two different times. However, it should
be noted the index numbers not only measure changes over a period of time but also compare
economic conditions of different locations, different industries, different cities or different
countries. But since the basic problems are essentially the same and since most of the important
index numbers published by the Government and private research organisations refer to data
collected at different times, we shall consider in this chapter index numbers measuring changes
relative to time only. However, methods described can be applied to other cases also.
• The trend of the phenomenon under study can be obtained by measuring the changes over a
period of time. On the basis of this analysis can be done. For example, by examining the index
numbers of industrial production, business activity etc. their trend can be understood and
analysed.
• Index numbers are very useful in deflating i.e., they are used to adjust the original data for price
changes, or to adjust wages for cost of living changes and thus transform nominal wages into
real wages. Moreover nominal income can be transformed into real income and nominal sales
into real sales through appropriate index numbers.
• It may be concluded that index numbers are strong tools into the hands of the economists and
business analysts with the help of which they can measure changes in certain phenomenon
over a period of time or through a geographical location. This enables them to form suitable
policies to obtain the desired results. Past, present and future trends and tendencies are revealed

LOVELY PROFESSIONAL UNIVERSITY 213