Chapter-8
INDEX NUMBERS
Index number
An index Number is a statistical measure designed to show changes in a variable or group of related
variables with respect to time, geographical location or other characteristics.
Features or characteristics of index number.

They are expressed in percentages.

They are special type of averages.

They measure the effect of changes over a period of time.
Difficulties or problems in the construction of index number.

Defining the purpose of index number

Selection of items.

Selection of prices.

Selection of base period.

Selection of weights

choice of an average
The various uses of index number are:

Index numbers help us to measure changes in price level.

Index numbers help us to know changes in cost of living.

Index number help government in adjustment of salaries and allowances

Index numbers help us to know targets achieved in production and their comparison.

Price index is of two types:

Simple or unweighted price index numbers

Weighted price index numbers
Quantity index numbers measure the change in physical volume of production, construction
or employment.
Simple and weighted index numbers
Simple and Weighted are two broad categories of index numbers.
SIMPLE INDEX NUMBER
Simple index number is method of constructing an index number in which every commodity is
given equal importance.
Inflation is defined as a consistent and significant rise in prices in a country over a time period. It
cannot be described as a slight increase in prices or an irregular increase in prices, but, as a situation
characterized by a sustained increase in the general price level.
Features of Inflation and Index Numbers:
1.
The most popular price index for determining the country’s inflation rate is the Wholesale
Price Index.
2.
It reveals the price movement of commodities in all trade and transactions.
3.
It is merely a generic index that comprehensively captures price variations.
4.
The Wholesale Price Index is available on weekly basis and the shortest time lag possible is
2 weeks.
Due to all of these characteristics, the Wholesale Price Index is the most often used inflation
measure.
If a person’s money remains constant, his purchasing power decreases as a result of inflation.
Accordingly, workers keep bothering the government for dearness allowance (DA) to compensate
for the decline in purchasing power during the inflationary period. If the Wholesale Price Index
increases by 100%, the value of money falls to 50%. The price level is doubled, and the rupee’s
purchasing power is halved. A 10% increase in the price level means a 10% drop in the purchasing
power of the people’s money if their income stays the same.
A fall in the rate of inflation does not imply a fall in the price level
The distinction between inflation and the pace of inflation should not be ignored. Inflation is
measured as a percentage increase in the general price level, which goes from 100 in 2019 to 120 in
2020, or a 20% annual increase. While prices generally increase throughout the year, this may not be
the case every week or even at the same rate. The weekly relative changes in the price index are
measured by the rate of inflation.
Where,
A1 = Wholesale price index for week 1
A2 = Wholesale price index for week 2
As a result, the rate of inflation may increase or decrease over the year. It just signifies an increase
or decrease in the pace of inflation or an increase or decrease in the speed of inflation, not a fall in
the price level. In week 1, the rate of inflation may be 6% while in week 2, the rate of inflation
maybe 5%. The decline from 6% to 5%, should not be taken as a fall in the price level. It just
denotes a fall in the speed at which prices tend to rise.
Example:
If the Wholesale Price Index increases from 100 in 2011-2012(base year) to 200 in 2020, and if the
price rise has essentially been constant over time (the general price level has been increasing by
5–10% every year), it would be termed as a situation of inflation. This implies continuous corrosion
in the purchasing power of money.
WEIGHTED INDEX NUMBERS
Weighted index number is a method of constructing an index number in which
There are two methods of constructing simple or unweighted price index numbers:

Simple aggregate method

simple average of price relative method
Simple Aggregative Method: the formula is:
Where P1 and P0 indicate the price of the commodity in the current period and base.
Respectively.
Simple Average of price relative method: The formula is:
The two methods of constructing Weighted Index Number are:

Weighted Aggregative Method.

Weighted Average of price relative method.
In Weighted Aggregative Method, commodities are assigned weights on the basis of the quantities
purchased. purchased various formula used in this method are:
In Weighted Average of Price Relative Method, commodities are assigned leads on the basis of
base year values (W = p0q0), or fixed weights(W) are used. The formula is:
There are various types of index numbers. the widely used index numbers are:

Consumer price index

Wholesale price index

Index of industrial production

Agricultural production index

Sensex
Consumer Price Index is also known as Cost of living Index. CPI measures the average change in
retail prices paid by the ultimate consumers for a specified basket of goods and services.
The various steps involved in the construction of CPI are:

Decision about the class of people for which index number is to be constructed.

Conducting family budget enquiry regarding the items of the consumption.

Obtaining price quotations

to decide about weights.

choice of method of construction.
The method of constructing CPI is:
The various uses of consumer price index number are:

It is used in calculating purchasing power of money and real wages.

It is used for grand of dearness allowance to central government employees due to
change in price conditions.

It is used as guideline by government for deciding wage policy, price policy all
income policy.

It is used as a price deflator of income.

It is an indicator of movement of retail prices of most of the essential commodities.
Wholesale Price Index (WPI) measures the relative change in price of commodities traded on
Wholesale basis. Wholesale price index number indicates the change in general price level in the
economy. and like the CPI, it does not have any reference consumer category. it does not include
items pertaining to services WPI is used to measure the rate of inflation.
The various uses of wholesale price index are:

Basis of dearness allowance

Indicator of changes in economy

Helps in forecasting the changes in trade conditions.

Used to measure the rate of inflation.

Estimation of Monetary Value and Real value:
Goods included in WPI are classified into three categories:

Primary articles include food articles like cereals fruits spices etc. and non-food
articles like raw Jute, raw cotton, oil seeds etc.

Fuel power, light and lubricants include coal mining, mineral oil and electricity etc.

Manufactured products include sugar, textiles, chemicals, leather, machinery, etc.
Index number of industrial production (IIP) indicates the relative increase or decrease in the
level of industrial production or a percentage change in physical volume of output of commodities in
different industries it covers data on production in mining and quarrying manufacturing, electricity,
etc.
The formula of constructing index of industrial production is given by.
Agricultural Production Index (API)
The Production Index is a measures of Agricultural output changes which is calculated at 3 levels:
Countries Region (Economic classes, continents), and Global.
Sensex is in six showing changes in the Indian stock market. it is a short form of Bombay Stock
Exchange sensitive market.
Human development index at HDI
HDI is a Composite Index developed by UN to assess the relative performance of different countries
in the area of social and economic development. It is a Composite Index, has its construction is
based on different indicators of human development.
Three basic indicators of HDI

Life expectancy

Education

Standard of living