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Index Number - 1

1. Index numbers are statistical devices that measure relative changes in variables like prices, production, or income over time or between locations. They allow comparisons by expressing values as a percentage of a base period or location. 2. The document outlines the key concepts in index numbers including price relatives, quantity relatives, value relatives, base years, current years, and types of index numbers. 3. The construction of index numbers involves selecting items, obtaining price quotations, choosing weights and a formula, and setting a base period that is economically stable and not too distant from the current period.

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200 views6 pages

Index Number - 1

1. Index numbers are statistical devices that measure relative changes in variables like prices, production, or income over time or between locations. They allow comparisons by expressing values as a percentage of a base period or location. 2. The document outlines the key concepts in index numbers including price relatives, quantity relatives, value relatives, base years, current years, and types of index numbers. 3. The construction of index numbers involves selecting items, obtaining price quotations, choosing weights and a formula, and setting a base period that is economically stable and not too distant from the current period.

Uploaded by

Resh Ram
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DPUE

STATISTICS NOTES
INDEX NUMBER – 1

1
UNIT – II
INDEX NUMBER
Introduction:

We often read in news papers about the relatives changes in,

1. The price of particular commodities like steel, gold, leather etc.


2. Volume of trade, factory production, industrial or agricultural production,
imports or exports, stocks and shares, sales and profits of a business
house and so on.
3. The national income of a country, wage structure of workers in various
sectors, bank deposits, foreign exchange reserves, cost of living of
persons of a particular community or class or profession and so on, as
compared to a previous period.

These facts are described using the index numbers.

Index numbers act as economic Barometers: Index numbers are helpful in


measuring the pressure (Variations or Fluctuations) of economic and
business behavior of the economy of a country.

Definition: “ Index numbers are statistical devices designed to measure


the relative changes in the level of a phenomenon (variables or a group
of variables) with respect to time, geographical location or other
characteristics such as income, profession etc”.

Example: If index number of wholesale price of milk products in 2010 as


compares to 2000 is 130, the implication is that overall level of wholesale
prices of milk products in 2010 has increased by 30% of the level in 2000.

(Here 2010 is the Current year and 2000 is the Base year)

Base Year: The year selected for comparison is called the base year.

Current Year: The year for which comparisons are required is called the
current year.

2
Price Relative (P): It is the price in the current year (p1) expressed as the
percentage of the price in the base year (p0).
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑷𝒓𝒊𝒄𝒆 𝒑𝟏
Price Relative (P) = × 100 = ×100
𝑩𝒂𝒔𝒆 𝒀𝒆𝒂𝒓 𝑷𝒓𝒊𝒄𝒆 𝒑𝟎

Quantity Relative (Q): It is the ratio of quantity of commodity in the


current year (q1) expressed as the percentage of the quantity in the base year
(q0).
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒒𝟏
Quantity Relative (Q) = × 100 = ×100
𝑩𝒂𝒔𝒆 𝒀𝒆𝒂𝒓 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒒𝟎

Value Relative (V): It is the ratio of value of commodity in the current year
(v1) expressed as the percentage of the value in the base year (v0).
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑽𝒂𝒍𝒖𝒆 𝒗𝟏 𝒑𝟏 𝒒𝟏
Value Relative (V) = × 100 = ×100 = × 100
𝑩𝒂𝒔𝒆 𝒀𝒆𝒂𝒓 𝑽𝒂𝒍𝒖𝒆 𝒗𝟎 𝒑𝟎 𝒒𝟎

Characteristics of index numbers:

1. Index numbers are specialized type of averages.


2. Index numbers are expressed in ratios but for comparison purpose they
are expressed in percentages.
3. Index numbers study the effect of factors that cannot be measured
directly.
4. Index numbers facilitates the comparison.

Uses (Importance) of index numbers:

1. Index numbers simplifies the data thus facilitates comparative study.


2. Index numbers are used in studying trends and tendencies.
3. Index numbers help in measuring purchasing power of money and also
used for deflation.
4. Index numbers measure change in cost of living of different groups of
people.
5. Index numbers are used by the government to frame suitable policies
regarding fixation of bank rates, allowances to government employees,
license to new firms, imports, exports, taxation, etc.

3
Limitations or Demerits of Index numbers:

1. Index numbers are based on the sample data, they are only approximate
indicators.
2. There is a likelihood of error being introduced at each stage of the
construction of the index numbers.
3. While constructing index numbers, the quality of product is not taken into
considerations.
4. Like other statistical techniques, index numbers can be misused, to get
desired conclusions.
5. As customs, traditions and habits of people vary from time to time, it is
difficult to assign proper weights to the various items.
6. Many formulae are used in the construction of index numbers and the
different formulae give different answers.

Types of Index numbers:

1. Price index numbers: The price index numbers measure the general
change in the prices of articles in the current period as compared to that
of the base period. It is denoted by P01.
Price index numbers are further sub-divided into the following classes.
(a) Wholesale price index numbers.
(b) Retail price index numbers.

2. Quantity index numbers: Quantity index numbers study the relative


change in the volume of goods produced (manufactured) or consumed or
distributed. It is denoted by Q01.

3. Value index numbers: Value index numbers study the relative change in
the total money value (price multiplies by quantity) of production
(transaction). It is denoted by V01.

4
Steps in the construction of index numbers: (Points to be remembered
while constructing index numbers or problems in the construction of
index numbers).
The following are the some of the main steps involving the
construction of index numbers.
1. Defining the purpose of the index number.
2. Selection of base period.
3. Selection of commodities or items.
4. Obtaining price quotations.
5. Choice of an average
6. Selection of weights.
7. Selection of suitable formula.

Points (Norms) are to be considered while selecting the base period:

i) Base period should be economically stable.


ii) The base period should not be too distant from the given period.
iii) Depending on the situation the base period is fixed-base or chain-
base.
iv) The base year vale is taken as 100.

5
Assignments Questions

One mark questions:

1. What is an index number?


2. Why index numbers are known as ‘economic barometers’?
3. Define price relative.
4. What is the value of index number for the base year?
5. If the current year price index is 175, what would you conclude?
6. Mention one use of index numbers.
7. Mention one limitation of index numbers.
8. Mention one characteristic of index numbers.

Two mark questions:

1. State two characteristics of index numbers.


2. State two uses of index numbers.
3. State two limitations of index numbers.
4. State two norms (considerations) for the selection of base year.
5. Mention the steps involved in the construction of general price index
number.

Five mark questions:

1. Write down the uses of index numbers


2. Write down the limitations of index numbers.
3. What are the steps involved in the construction of index number?
Explain any three.

Bharath G Pai

St. Philomena PU College, Puttur.

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