When we talk that the general level of industrial production has registered an increase of 4 per cent, it is obvious that we are referring to the production of all those items that are produced by the industrial sector. However, production of some of these items may be increasing while that of others may be decreasing or may remain constant. The rate of increase or decrease and the units in which these items are expressed may differ. For
instance, cement may be quoted per kg, cloth may be per meters, cars may be per unit etc. In such a situation, when the purpose is to measure the changes in the average level of prices or production of industrial products for comparing over a time or with respect to geographic location, it is not appropriate to apply the technique of measure of central tendency because it is not useful when series are expressed in different units or/and in different items. It is in these situations, that we need a specialised average, known as index numbers. These are often termed as ‘economic barometers’. An index number may be defined as a special average which helps in comparison of the level of magnitude of a group of related variables under two or more situations.
Index numbers are a series of numbers devised to measure changes over a specified time period (the time period may be daily, weekly, monthly, yearly, or any other regular time interval), or compare with reference to one variable or a group of related variables. Thus, each number in a series of specified index number is:
a) A pure number i.e., it does not have any unit.
b) Calculated according to a pre-determined formula.
c) Generated at regular time intervals, sometimes during the same time interval at different places.
d) The regular generation of numbers form a chronological series.
e) With reference to some specified period and number known as base period and base number, the latter is always 100. For example, if the consumer price index, with base year 1996 is calculated to be 180 for the year 2003, it means that consumer prices have increased by 80 per cent in 2003 as compared to the prices prevalent in 1996.
