Page 220 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes with the help of index numbers and they are also useful in deflating. In the words of Kafka and
Simpson, “Index numbers are today one of the most widely used statistical devices. They are
used to feel the pulse of the economy and they have come to be used as indicators of inflationary
or deflationary tendencies.”
• Index numbers are constructed in the form of specialised averages with definite purpose and
with some base period. Before constructing index numbers, it is necessary to know about the
various problems which arise in its construction so that they can be minimised.
• Base period is the one against which comparisons are made. It may be year a month or a day.
The index for base period is always taken to be 100. It is essential to choose an appropriate base
before constructing index numbers.
• To study the change in a certain phenomenon, it is not possible to include each and every item
leading to change. For example, while constructing price index, change in price of each and
every item cannot be included. The selection of commodities should be such that they are
representative of the tastes, preferences and habits etc. of the group of people regarding whom
the index is constructed. In this way, it becomes a big problem as to which items to be included
and which to be excluded ? Again, by having purpose of index properly defined, the selection
of items can be eased. Index numbers would give false results if at one time one set of quantities
are used and at other time other set of quantities are used.
• The term ‘weight’ refers to the relative importance of the different items in the construction of
the index. All items are not of equal importance and hence it is necessary to device some suitable
method which is done by allocating weights. In case of weighted indices, specific weights are
assigned. Implicit or explicit methods of assigning weights can be used. Quantity or value
weights can be assigned. If aggregative method is used, quantities are used as weights and in
averaging of price relatives method of constructing index, value weights are used. Moreover, it
has to be decided whether the weights would be fixed or fluctuating. In this way selection of
appropriate weights forms a very crucial problem in constructing index.
• The change in the level of certain phenomenon can be measured only when proper data regarding
quotations is available. For example, while preparing price index, it is essential to obtain proper
price quotations of the selected commodities. Or while preparing expenditure index, information
about expenditure should be available.
• One of the simplest types of index numbers is a price relative. It is the ratio of the price of a single
commodity in a given period or point of time to its price in another period or point of time,
called the reference period or base period. If prices for a period, instead of a point of time, are
considered, then suitable price average for the period is taken and these prices are expressed in
the same units.
• Simple type of index numbers is a quantity relative, when we are interested in changes in
quantum or volumes of a commodity such as quantities of production or sale or consumption.
Here the commodity is used in a more general sense. It may mean the volume of goods (in
tonnes) carried by roadways, the number of passenger miles travelled, or the volume of export
to or import from a country. In such cases we consider of quantity or volume relatives. If
quantities or volumes are for a period instead of a point of time, a suitable average is to be taken
and the quantities or volumes are to be expressed in the same units.
• A value relative is another type of simple index number, usable when we wish to compare
changes in the money value of the transaction, consumption or sale in two different periods or
points of time. Multiplication of the quantity q by the price p of the commodity produced,
transacted or sold gives the total money value pq of the production, transaction or sale. If instead
of point of time, period of time is considered, a suitable average is to be taken and is to be
expressed in the same units.

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