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Index Numbers and Time Series

Introduction, Characteristics, Uses, Types, Method of Constructing Unweighted Index numbers

Definition : Index Numbers are used to measure the change in some quantity which we cannot observe directly.

        From the given definition, the following features of index numbers can be derived.
  • Index numbers are used to depict relative changes in variables; that is, they analyse changes in a variable with respect to a base year (a standard point of comparison).
  • These numbers are generally expressed in the percentage form. The idea behind using the relatives is that it is easier to compare the relatives and these relatives can be easily added.
  • With the help of an index number, two series with different units can also be compared easily. Thus, an index number is said to be a specialised average.
  • An index number helps in estimating the absolute quantitative changes in variables. For example, if the price index is 130 in 2008 compared to 100 in 2002, then this suggests that the price has risen by 30%. However, it must be noted that even if the index shows a rise in the price level by 30%, there may be some commodities whose prices must have fallen.

Characteristics of Index Numbers

1) Index Numbers can be expressed in numbers only, though the change can be expressed in words also, but the index numbers represents these change numbers.

2) Index numbers are of special type of average because in simple average data are uniform and their units are also even, whereas in index numbers the data having different measurement units are also used for these percentages as price relatives. Price relatives are averaged for computing index numbers.

3) The index numbers are comparative in nature because they measure relative changes and relative changes are computed on the basis of some other data so it  can be  said that index  numbers are comparative in nature.

4)  Index numbers are used to measure the changes in prices in the group of items but the changes in the quantity of agricultural production, imports, and exports can also be measured through index numbers. Hence, they act as a Universal Utility.

Basic Types of Index Numbers

i.  Price Index
ii. Quantity Index
iii. Value Index
iv. Specific Index

i. Price Index: Price index is an index that measures overall changes in the price levels of a commodity in the economy between two periods. These prices can either be retail or wholesale.

Simple price index = P1(Current year prices)P0(Base year prices)×100

The following note describes the two types of index numbers.

ii. Quantity Index: It measures overall changes in the physical quantity of  goods produced, consumed or sold in the economy between two periods. This index helps in taking production decisions. It is periodically used for the commodities that are subject to price variations.

Quantity index = Q1(Current year quantity)Q0(Base year quantity)×100

iii. Value Index: It facilitates comparison of the total value produced (Price × Quantity) in the current year with that produced in the base year.

Value index=Total value of current yearTotal value of base year×100=ΣP1Q1ΣP0Q0×100

iv. Specific Index: It includes all those indices that are computed by various researchers, industrial units, etc. in order to get some specific or purposive information. For instance, the index of industrial production, index used for trac…

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