Index Numbers: Types and Applications

(Image will be uploaded soon)

In the study of statistics, index numbers are the utmost requisite. Imagine how it would be without these numbers while you change the variable in the estimation of any particular statistics! The procedure itself will turn out to be completely ineffective. Thus, index numbers are the measurement of any change in a variable or variables across a determined period. These numbers show a general relative change and not a direct measurable figure. An index number is expressed in the percentage form.

Let us know more about the Index numbers – their importance, characteristics, types, and limitations will be discussed accordingly. We also have included a bonus section, continue to study the content to find out the same.

Importance of Index Number 

Index numbers are most commonly used in the study of the economic status of a particular region. As mentioned, the index number defines the level of a variable relative to the level in a particular period of time span. These index numbers serve as a measure to study the change in the effects of all the factors that cannot be measured or estimated on a direct basis.

Thus, Index numbers occupy an important place due to their efficacy in measuring the extent of economic changes across a stipulated period. It helps to study such changes' effects due to factors that cannot be directly measured.

How would You identify an Index Number? – Features and Characteristics of Index Numbers 

The main highlighting features of index numbers are mentioned as below–

• It is a special category of average for measuring relative changes in such instances where absolute measurement cannot be undertaken

• Index number only shows the tentative changes in factors that may not be directly measured. It gives a general idea of the relative changes

• The method of index number measure alters from one variable to another related variable

• It helps in the comparison of the levels of a phenomenon concerning a specific date and to that of a previous date

• It is representative of a special case of averages especially for a weighted average 

• Index numbers have universal utility. The index that is used to ascertain the changes in price can also be used for industrial and agricultural production.

Types of Index Numbers

There are various types of index numbers that have particular usage. We will study the types of Index numbers to know the same. This section which is related to the types of Index numbers will help the students to understand the importance of each type in regard to the task which is practiced for.

Value Index

A value index number is formed from the ratio of the aggregate value for a particular period with that of the aggregate value that is found in the base period. The value index is utilized for inventories, sales, and foreign trade, among others.

Quantity Index 

A quantity index number is used to measure changes in the volume or quantity of goods that are produced, consumed, and sold within a stipulated period. It shows the relative change across a period for particular quantities of goods. Index of Industrial Production (IIP) is an example of Quantity Index.

Price Index

A price index number is used to measure how price alters across a period. It will indicate the relative value and not the absolute value. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are major examples of a price index. 

Uses of Index Number in Statistics 

We have known the features and types of the Index numbers. For a further comprehensive study, we will now discuss the uses of Index numbers.

Index numbers are useful in many basic to complicated studies. Like it is used in the basic study of human population in a country and also it is used to determine the extinction rate of the rare animals in a particular region. There are many more usages of Index Numbers, let us find out: 

• It helps in measuring changes in the standard of living as well as the price level. 

• Wage rate regulation is consistent with the changes in the price level. With the determination of price levels, wage rates may be revised.

• Government policies are framed following the index number of prices. This price stability inherent to fiscal and economic policies is based on index numbers.

• It gives a pointer for international comparison concerning different economic variables—for instance, living standards between two countries.

Advantages of Index Number

The advantages of Index numbers are directly linked with their usages. So the summation advantages are studies as under:

• It adjusts primary data at varying costs, which is useful for deflating. It facilitates the transformation from nominal wage to real wage.

• Index numbers find extensive usage in economics and help in the framing of appropriate policies. Such findings help with the establishment of researches as well.

• It helps in the case of trends such as drawing outcomes for irregular forces and cyclical forces.

• Index numbers can be leveraged in case of future development of activities in the economic sphere. This time series analysis is utilized for the determination of trends and cyclical developments.

• The number is useful in measuring the changes that take place in the standard of living in different countries over an established period.

Limitations of Index Number 

We know everything existing has both advantages and limitations. Index numbers have a lot of advantages, but to an extent, this is when their limitations creep up. The limitations of index numbers are as follows:

• There are chances for errors given that index numbers come as a result of samples. These samples are put together after deliberation, which creates chances for errors. It can also be found in weights or base periods etc.

• It is always calculated based on items. Items that are so selected may not exactly be in trend, which in turn creates an inaccurate analysis. 

• Multiple methods can be used to formulate index numbers. Due to this multiplicity of methods, outcomes may bring forward a different set of values which may further lead to confusion.

• The index numbers show the approximate indications of the relative changes that occur. Moreover, the changes in variables that are compared over a prolonged time may fall short on reliability.

• The selection of representative commodities may be skewed. It is since these commodities are based on samples.

The Bonus Section! Test Your Knowledge in Index Numbers

We have included this brief ‘testing your knowledge’ section so that the students can have an estimated idea of their knowledge in Index numbers. The students are required to choose the correct option and the answer related to each question is also given in the same.

1. Choose the features of the index number from the following.

1. Specialized average 

2. Measurement of change over a time period 

3. Indicated in percentage form

4. All of the above

Ans: (d)

2. Index number measures the changes in variables or variables over time. 

1. True 

2. False 

3. At times

Ans: (a)