Though originally the index number was developed for measuring the effect of change in prices, today they have become indispensable for analyzing the data related to business and economic activity. This statistical tool can be used in several ways as follows:


1) Decision makers use index numbers as part of intermediate computations to understand other information better. Nominal income can be transformed into real income. Similarly, nominal sales into real sales & so on …, through an appropriate index number. Consumer price index, also known as cost of living index, is arrived at for a specified group of consumers in respect of prices of specific commodities and services which they usually purchase. This index serves as an indicator of ‘real’ wages (or income) of the consumers.


2) Different types of price indices are used for wage and salary negotiations, for compensating in price rise in the form of DA (Dearness Allowance).


3) Various indices are useful to the Government in framing policies. Some of these include taxation policies, wage and salary policies, economic policies, custom and tariffs policies etc.


4) Index numbers can also be used to compare cost of living across different cities or regions for the purpose of making adjustments in house rent allowance, city compensatory allowance, or some other special allowance.


5) Indices of Industrial Production, Agricultural Production, Business Activity, Exports and Imports are useful for comparison across different places and are also useful in framing industrial policies, import/export policies etc.


6) BSE SENSEX is an index of share prices for shares traded in the Bombay Stock Exchange. This helps the authorities in regulating the stock market. This index is also an indicator of general business activity and is used in framing various government policies. For example, if the share prices of most of the companies comprising any particular industry are continuously falling, the government may think of changes in its policies specific to that industry with a view to helping it.


7) Sometimes, it is useful to correlate index related to one industry to the index of another industry or activity so as to understand and predict changes in the first industry. For example, the cement industry can keep track of the index of construction activity. If the index of construction activity is rising, the cement industry can expect a rise in demand for cement.


8) If you are informed that the price of one kilogram sunflower oil was Rs.0.50 per kg. in the year 1940 and in the year 1980 it was Rs. 30 and in the year 2004 it is reported to be Rs. 70, per kg in the year 2018 the price was Rs. 160 per kg, and if you are asked this question: shall sunflower oil be sold again in the future for either Rs.0.50 or Rs. 30 or Rs. 70 per kg?  Surely, you answer would be ‘No’.

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