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Unit 10: Index Number

Introduction Notes

An index number is a statistical measure used to compare the average level of magnitude of a
group of distinct but related variables in two or more situations. Suppose that we want to
compare the average price level of different items of food in 1992 with what it was in 1990. Let
the different items of food be wheat, rice, milk, eggs, ghee, sugar, pulses, etc. If the prices of all
these items change in the same ratio and in the same direction; assume that prices of all the items
have increased by 10% in 1992 as compared with their prices in 1990; then there will be no
difficulty in finding out the average change in price level for the group as a whole. Obviously,
the average price level of all the items taken as a group will also be 10% higher in 1992 as
compared with prices of 1990. However, in real situations, neither the prices of all the items
change in the same ratio nor in the same direction, i.e., the prices of some commodities may
change to a greater extent as compared to prices of other commodities. Moreover, the price of
some commodities may rise while that of others may fall. For such situations, the index numbers
are very useful device for measuring the average change in prices or any other characteristics
like quantity, value, etc., for the group as a whole.

Another important feature of the index number is that it is often used to average a characteristics
expressed in different units for different items of a group. For example, the price of wheat may
be quoted as /kg., price of milk as /litre, price of eggs as /dozen, etc. To arrive at a single
figure that expresses the average change in price for the whole group, various prices have to be
combined and averaged in a suitable way. This single figure is known as price index and can be
used to determine the extent and direction of average change in the prices for the group. In a
similar way we can construct quantity index numbers, value index numbers, etc. It should be
noted here that.

Did u know? Index numbers are specialized type of averages that are used to measure the
changes in a characteristics which is not capable of being directly measured. For example,
it is not possible to measure business activity in a direct way, however, relative changes in
a business activity can be determined by the direct measurement of changes in some
factors that affect it. Similarly, it is not possible to measure, directly, the price level of a
group of items, but changes in price level can be measured by using price index numbers.
10.1 Definitions and Characteristics of Index Numbers

Some important definitions of index numbers are given below:
“An index number is a device for comparing the general level of magnitude of a group of
distinct, but related, variables in two or more situations.” — Karmel and Polasek
“An index number is a special type of average that provides a measurement of relative changes
from time to time or from place to place.” — Wessell, Wilett and Simone

“Index number shows by its variation the changes in a magnitude which is not susceptible either
of accurate measurement in itself or of direct valuation in practice.” — Edgeworth
“An index number is a single ratio (usually in percentage) which measures the combined (i.e.,
averaged) change of several variables between two different times, places or situations.”
— Tuttle

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