2. 2
Contents
Index Number
Definition
Type of Index Number
Characteristics
Importance
Uses
Limitation
3. 3
Introduction
● An index number measures the relative change in price ,
quantity , value, or some other item of interest from one time
period to another.
● A simple index number measures the relative change in one or
more than one variable.
4. 4
Definition
● “Index number are quantitative measures of growth of
prices, production, inventory and other quantities of
economic interest.”
-Ronold
5. Type of Index
Number
● Price index
● Quantity index
● Stock market index
● Exchange Rate index
6. Type of Index
Number
● Price index: A price index measures changes in the prices ofa
basket of goods and services over time. Price indices are used to
measure inflation and include measure such as the Consumer
Price Index (CPI), Wholesale Price Index (WPI), and Producer
Price Index (PPI).
● Quantity index: A quantity index measures changes in the
quantity of goods and services produced or consumed over
time. Quantity indices are used to measure changes in growth
and include measures such as the Gross Domestic Product
(GDP) Index.
7. Type of Index
Number
● Stock market index: An exchanges in the prices of a basket of
stocks over time. Stock market indices are used to measure the
performance Stock markets and include measures such as the
S&P 500 and the Dow Jones Industrial Average.
● Exchange Rate index: An exchange rate index measures
changes in the value of a currency relative to a basket of other
currencies over time. Exchanges rate indices are used to
measure changes in exchanges rates and imclude measures such
as the Trade-Weighted Exchange Rate Index.
8. Characteristics
● Index number are specialised average.
● Index number measure the change in the level of a
phenomenon.
● Index number measure the effect of changes over a period
of time.
9. Importance
● Measure Changes: Index number provide a standardized way
of measuring.
● Simplification: Index number simplify complex data by
converting them into a single number.
● Policy Making: Index number are often used in policy making.
For example, the inflation rate is used to adjust interest rates,
taxes, and other economic policies.
● Cost of Living: Index number are important for measuring the
cost of living.
10. Uses
● To framing suitable policies.
● They reveal trends and tendencies.
● Index numbers are very useful in deflating
11. Limitation
● Weighting Bias: The weights assigned to items in the basket
may not accurately reflect their importance to the variable being
measured. Changes in the weighting of items over time can also
affact the index number.
● Quality Bias: Changes in the quality of goods and services
over time can affect the index number. For example,
improvements in the quality of technology products may
lead to higher prices, but this does not necessarily inflation.
