G. Jamunarani Assistant Professor, Department of Economics Ethiraj college for women, Chennai

2. INDEX NUMBER
• Introduction
• Meaning
• Definition
• Features
• Notations used in Index Number
• Uses
• steps
• Limitations of Index Number

3. INTRODUCTION
• The value of money is the purchasing power of consumer.
• The value of money does not remain constant over time
• There is a inverse relationship between value of money and
price level
• It may rise or fall and is inversely related to the changes in
the price level
• Rise in the price level leads fall in the value of money
• Fall in the price level leads rise in the value of money
• Changes in the general level of prices can be measured
through a statistical device known as
INDEX NUMBER

4. MEANING
It is an economic data figure reflecting price or
quantity compared with a standard or base
values
It is statistical device which enables us to arrive
at a representative figure
Index number is a technique of measuring
changes in a variables or group of variables

5. DEFINITIONS
MASLOW
It is the numerical value charecterising the
changes in a complex economic phenomena
over a period of time or space”
CROXTON
“It is a device for measuring differences in the
magnitude of a group of related variable”
L.V. LESTER
“An Index number of price is a figure showing
the height of average prices at one time relative to
their height at some other time which is taken as
the base period.”

6. FEATURES
Index numbers are
used for comparison
of variables in
different units
It is a special type
of averages
It measures the
changes over a
period of time
It measures the changes
in both composite and
complex phenomenon
It helps to compare economic
conditions of different
business unites in relation
to some base year

7. NOTATIONS
Base year(0)
Current year
P0
P1
q0
q1
W
P01
P10
The year selected for which a comparison are
made
The year for which comparison are required
Price of commodity in the Base Year
Price of commodity in the current year
Quantity ofa commodity purchased during the base
year
Quantity of a commodity purchased during the
current year
Weight assigned to a commodity accoding to its
importance in the group
Price index number for the current year with
reference to the base year
Price index number for the base year with reference
to the current year

8. • q01
• q10
• ∑
NOTATIONS
Quantity index number for the current year with reference to base
year
Quantity index number for the base year with reference to the
current year
It helps to denotes the aggregates

9. USES
• It helps to measures changes in the price level.
• It acts as an indicator of inflation.
• It provides information about the production trends in different
sectors
• It helps in studying trends and forecasting demand and supply.
• It acts as an economic Barometer.
• It helps to measure and compare changes
• It measures the purchasing power
• It highlights the changes in the cost of living in an economy
• It helps the planner to formulate appropriate economic
policies.
• They are very useful for academic and also practical Research.

10. STEPS INVOLVED IN THE CONSTRUCTION OF INDEX
NUMBER
Defining the purpose of Index
Number
Selection of Base
Selection of Commodities
Sources of Data
Selection of Averages
Selection of weight
Price index to measure consumer
prices should not include
wholesale price
Fixed base
Average base and Chain base
Only those commodities mostly
consumed by the consumers
Data should be collected from the
public or from the std magazine
Geometric or Harmonic mean can
be perfect one
Weighting should properly represent
the commodity
Selection of Methods
Suitable methods for the
construction of Index Number

11. LIMITATIONS
• It is not possible to take into account each and every item in the construction of
index as it is based on sample .
• Since indices are constructed based on random sample there is a chance of error
namely selection of commodities, base period and weight etc.,
• Taste and preference, customs may change in course of time make weighting not
suitable for the present data
• Quality of commodity should remain the same over a period of time because
differences in quality would mean differences in prices also.
• Large number of methods are designed to construct index number thus it is
necessary to ensure that same formula is adopted over a period of time for
constructing index number