Index numbers measure changes in price or quantity over time, allowing for economic comparisons and indicating the purchasing power of money. They are characterized as averages and percentages, serving as economic barometers and tools for calculating real wages. Various tests, such as time reversal and factor reversal, ensure consistency in index calculations, while methods like splicing and deflating help manage base years and adjust for price changes.

1. Unit-5
INDEX NUMBERS

2. Meaning
 Index numbers which show changes in price or
quqntity in one time compared with another
alone .
 A price index number is the percentage of
change in the price of one commodity or one
group of commodity in the current year
compared with the base year.

3. CHARACTERSTICS OF INDEX NUMBER
 Index numbers are a special type of
averages.
 Index numbers are percentage.
 Index numbers indicate the percentage
of change which is not possible
otherwise.
 Index numbers are meant for
comparsion.

4. Uses of index numbers
Index numbers provide scope for comparsions.
Index numbers are economic barometres.
Index numbers serve as guide.
Index numbers the pulse of an economy.
Index numbers measure the purchasing power of money.
Purchasing power of one rupee=100
Price index
Index numbers help to calculate real wages.

5. General problems of
index numbers
The purpose
The base period
The items
The price quotations
The average
Weighting

6. Formulae of index
numbers
P0 – Price of a commodity in the base year
P1- Price of a commodity in the current year
Q0-quantity of a commodity in the base year
Q1-quantity of a commodity in the current year
P-Price of a commodity
Q-quantity of a commodity
V or W-weight of a Commodity

7. TIME REVERSAL TEST
This requires the formulae to be such as that p01xp10=1
In the word of prof irving fisher who proposed the test
condition
The formuae for calculating the index number should
be such as same ratio between one point of comparsion
and the other no matter which of the two is taken as
base or putting it in another way

8. Factor reversal test
Factor reversal test requires the factor.
Just as our formula should permit the interchange of two
times without giving inconsistent results.
P01 Give The Relative Change In Price While Q01 Gives
The Relative Change In Quantity.

9. Cost of living index
Cost of living index number shows the impact of changes
in the prices of a number of commodities and services on
a particular class of people in the current year in
comparsion with the base year.

10. STEPS IN THE CONSTRUCTION OF
COST OF LIVING INDEX NUMBERS
The purpose
The base year
The family budget enquiry
The prices
The average
The formula

11. SPLICING
 Splicing two or more series of index number
with different base years are made into one with
a common year.
 Splicing is base shifiting also
 It is not for one year but for a series of years.
 There are two kinds of splicing
 Forward splicing
 backward splicing

12. DEFLATING
 Deflating Means Effect Of Prices Change
Removing The effect under considersation for
the purpose of study.
 It is considered in the light of ‘constant price’ to
conculde whether it has increased or decreased.
 Index numbers indicate the price changes and so
they are the deflators.
 Different index numbers are to be used for
deflating values.

13. FIXED BASE
Base year data are available for more than two years the
question which is the base year arises.
Fixed base method the base year is same for all the
different years under considersation.
Base year fiqures may be figures of any one year or the
averages of a few years.
Although index number can be calculated buy more than
one method.