INDEX NUMBERS ASSIGNMENT HELP

Index number is a number which expresses the relative change in magnitude of a variable or number of variables during a specified period. The variable may be the price of a certain commodity, quantitative production of certain goods or the cost of living. It is a statistical device to measure the level of certain phenomena in comparison with a certain period known as base period, which may be a week month, year or group of years. The index numbers are known as economic barometer or economic indicators since they help in understanding the changes in economic conditions of the society. Index number are numbers which show by their variation, the change in magnitude which is not susceptible either of accurate measurement in itself or of direct valuation in practice.

Index number of prices play a vital role in measuring the general economic conditions of the society and is fixing the wages, Dearness Allowance as well as in the setting up of new industries. The index numbers provide some guideline that one can use in making decisions. Index number are highly useful in deflating i.e., they are used to adjust the original data for price changes, or to adjust wages for cost of living changes and thus transform normal wage into real wages.

Types of Index Numbers:

There are three principal types of indices:

• The price index
• The quantity index
• The value index

The Price Index:

It compares level of prices from one period to another. Consumer price index measures price changes of a variety of consumer goods and services and is used to define the cost of living.

The Quantity Index:

It measures how much the number of quantities of a variable changes over time.

The Value Index:

The quantity times price is the value of an item, indexes that incorporate the product of quantity and price are called the value index. It is more informative index.

Problems Related to index Numbers:

Several things can distort index numbers so a careful thought must be given to the following points:

• Purpose: There is no all-purpose index. Every index is of limited and of limited use. So it is necessary to be clear about the purpose for which the index number is required. The problem of the scope of the index, i.e., the field to be covered by the index, is bound up with the purpose of the index and the data available. The data available or rather the lack of them may necessitate the modification of purpose.
• Selection of items: The selections of commodities differ with the purpose for which the index number is required.
• Choice of Base Period: The base period should be such that the conditions may be stable and normal during it. The base period should not be too distant is the past.
• Incomparability of Indices: When attempts are made to compare one index with another after there has been a basic change in what is being measured then we cannot compare the indices because in that situation indices are incomparable.
• Weighing factors: The weighing factors can also distort an index. In developing a composite index, such as Consumer Price index we must consider changes in some variables be more important than changes in others.

Weighted Aggregate Index:

The so called unweighted index numbers discussed above are not unweighted in the true sense of the term. They assign equal importance to all the items included in the index and as such they are in reality weighted weighs being implicit rather than explicit. Here the weighing allows us to include more information than just the change in price over time. It also lets us improve the accuracy of the general price level estimate based on our sample. The problem is to decide how much weight to attach to each of the variables in the sample. In general, there are three ways to weigh an index. The first involves using quantities consumed during the base period in computing each index number. This is known as laspeyres method after the statistician who developed it.

Quantity and Value Indices:

• Quantity Indices: Price index numbers measure and permit comparison of the price of certain goods whereas, quantity index number on the other hand, measure the physical volume of production, construction or employment. Though price indices are more widely used, production indices are highly significance as indicators of the level of output in the economy or in parts of it. In times of inflation, a quantity index provides a more reliable measure of actual output of raw materials and finished goods than corresponding value index does. Similarly, agricultural production is best measured by using a quantity index because it eliminates misleading effects due to fluctuating prices. We often use a quantity index to measures commodities that are subject to considerable price variation.
• Value Indices: The value of a single commodity in the product of its price of quantity. A value index measures general changes in the total value of some variable. The formula for calculating the value index V is

V = ( ∑p1q1/∑p0q0 )x 100

Where ∑p1q1 is the total value of all commodities in the given period and ∑p0q0 is the total value of all commodities in the base period.

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