There are three principal types of indices: price indices, quantity indices, and value indices.
Price Indices: This type of indices is the most frequently used. Price indices consider prices of a commodity or a group of commodities and compare changes of prices from one period to another period and also compare the difference in price from one place to another. For example, the familiar Consumer Price Index measuring overall price changes of consumer commodities and services is used to define the cost of living.
Quantity Indices: The major focus of consideration and comparison in these indices are the quantities either of a single commodity or a group of commodities. For example, the focus may be to understand the changes in the quantity of paddy production in India over different time periods. For this purpose, a single commodity’s quantity index will have to be constructed. Alternatively, the focus may be to understand the changes in food grain production in India, in this case all commodities which are categorized under food grains will be considered while constructing the quantity index.
Value Indices: Value indices actually measure the combined effects of price and quantity changes. For many situations either a price index or quantity index may not be enough for the purpose of a comparison. For example, an index may be needed to compare cost of living for a specific group of persons in a city or a region. Here comparison of expenditure of a typical family of the group is more relevant. Since this involves comparing expenditure, it is the value index which will have to be constructed. These indices are useful in production decisions, because it avoids the effects of inflation.
