Importance of Index Number in Business
An index number is a statistical device for comparing the general level of magnitude of a group of related variables in two or more situation. If we want to compare the price level of 2000 with what it was in 1990, we shall have to consider a group of variables such as price of wheat, rice, vegetables, cloth, house rent etc., if the changes are in the same ratio and the same direction; we face no difficulty to find out the general price level. But practically, if we think changes in different variables are different and that too, upward or downward, then the price is quoted in different units i.e milk for litre, rice or wheat for kilogram, rent for square feet, etc We want one figure to indicate the changes of different commodities as a whole. This is called an Index number. Index Number is a number which indicate the changes in magnitudes. M.Spiegel say, “ An index number is a statistical measure designed to show changes in variable or a group of related variables with respect to time, geographic location or other characteristic”. In general, index numbers are used to measure changes over time in magnitude which are not capable of direct measurement. On the basis of study and analysis of the definition given above, the following characteristics of index numbers are apparent. 1. Index numbers are specified averages.
2. Index numbers are expressed in percentage.
3. Index numbers measure changes not capable of direct measurement. 4. Index numbers are for comparison.
Uses of Index numbers
Index numbers are indispensable tools of economic and business analysis. They are particular useful in measuring relative changes. Their uses can be appreciated by the following points. 1. They measure the relative change.
2. They are of better comparison.
3. They are good guides.
4. They are economic barometers.
5. They are the pulse of the economy.
6. They compare the wage adjuster.
7. They compare the standard of living.
8. They are a special type of averages.
9. They provide guidelines to policy.
10. To measure the purchasing power of money.
Index number theory gives statistical agencies some guidance on what is the “right” theoretical target index. The problem historically has been that there have been many alternative index number theories and so statistical agencies have been unable to agree on a single target index to guide them in the preparation of their consumer price indexes or their indexes of real output. Most of the theoretical literature on index numbers centers on the case where complete price and quantity information is available for two periods where it is desired to compare says the level of prices in one of the periods with those of the other period. This is called bilateral index number theory as opposed to multilateral index number theory, which deals with many periods instead of just two. However, multilateral approaches can readily be built up using bilateral index number theory.
Types of Index numbers:
There are various types of index numbers, but in brief, we
shall take three kinds and they are
(a) Price Index, (b) Quantity Index and (c) Value Index (d) Consumer Price (a) Price Index:
For measuring the value of money, in general, price index is used. It is an index number which compares the prices for a group of commodities at a certain time as at a place with prices of a base period. There are two price index numbers such as whole sale price index numbers and retail price index numbers. The wholesale price index reveals the changes into general price level of a country, but the retail price index reveals the changes in the retail price of commodities such as consumption of goods, bank deposits, etc. (b) Quantity Index:
Quantity index number is the changes in the volume of goods produced or consumed. They are useful and helpful to study the output in an economy. (c) Value Index
Value index numbers compare the total value of a certain...
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