Chapter 8: Index numbers

## Chapter 8: Index numbers

1. Meaning: Index numbers is a statistical tool for measuring relative change in a group of related variables over two or more different times. 2. Features of an Index Number a. They are expressed in percentages. b. They are special types of averages. c. They measure the effect of change over a period of time.

##### Problems in construction of Index Numbers

a. Defining the purpose of index numbers b. Selection of items c. Selection of base period d. Selection of prices e. Selection of weights f. Choice of an average g. Choice of the formulae

##### Price index are of two types

a. Simple Index Number b. Weighted price Index numbers

#### Construction of simple Index Numbers:-

There are two methods a. Simple aggregate Method

b. Weighted Average of Price Relative Method:-

Under this method commodities are assigned weight or the basis of base’s year value (W= P0 Q 0 ) or fixed weights (W) are used.

### Uses of Consumer Price Index:- (CPI)

a. It is used in calculating purchasing power of money b. It is used for grant of Dearness Allowance. c. It is used by government for framing wage policy, price policy etc.
d. CPI is used as price deflator of income
e. CPI is used as indicator of price movements in retail market.

#### Wholesale Price Index (WPI):-

a. It measures the relative change in the price of commodities traded in wholesale market.
b. It indicates the change in the general price level. c. It does not include services

### Uses of WPI

a. Basis of Dearness Allowance
b. Indicator of changes in economy
c. Measures the rate of inflation

#### Index Number of Industrial Production (IIP)

It indicates the changes in level of Industrial production or a percentage change in physical volume of output of commodities in following industries

a. Mining
b. Quarrying
c. Manufacturing
d. Electricity etc.,

#### Uses of Index Numbers.

a. Helps us to measure changes in price level
b. Help us to know changes in cost of living
c. Help government in adjustment of salaries and allowances
e. Information to Politicians

### SENSEX

SENSEX is the short form of Stock Exchange Sensitive Index with 1978-79 as base. It is a useful guide for the investors in the stock market. It deals with 30 stocks represented by 13 sectors of the economy.

Questions:-
1. What is an Index Number?
2. What is a Base Year?
3. What is SENSEX?
4. Mention any three problems in the construction of Index Numbers
5. Calculate weighted average of price relative index from the following data

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