An index number is a specialised average which helps in comparison of the level of magnitude of a group of related variables with respect to time, geographical location or other characteristics such as production, income, employment, etc. It combines two or more time series variables related to non-comparable units.
Index numbers can be used in several ways, such as study trends and tendencies of business activities, provide guidelines in framing suitable policies, measure real purchasing power of money, help in transforming nominal wage into real wage and so on. The researcher may face various problems in the construction of different types of indices. They may be selection of the base period, collection of data, selection of commodities, choice of averages and weights, selection of an appropriate index. These issues must be clarified before constructing indices.
There are three principal types of indices (i) price indices, (ii) quality indices, and (iii) value indices. Among these three, price indicex is the most common in analysing the data.
Important Notes :-
Base period: It is the reference period against which comparisons are made.
Cost of Living Index: Numbers represent the average change in the prices paid by the consumer on specified goods and services over a period of time, popularly known as “Consumer Price Index Number”.
Index Number: A ratio for measuring differences in the magnitude of a group of related variables over time.
Price Index: A measure of how much the price variables change over a period of time.
Price Relative: In the construction of an index number, price relative for a commodity in the ratio of the current year price to base year price of that commodity.
Quality Index: A measure which studies the quantity of a variable changes from one period to another period.
Value Index: A measure for changes in total monetary worth over a time.
