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Meaning of Index Number
Index numbers are the tools that measure the degree of economic variation over a period. They are mainly in the numerical form stated as a percentage as a base figure. In layman’s terms, an index number is basically a number that shows the level of relativity in a given time. It is the measurement of any change in the value or variable over some time. These numbers show a relative change and not the exact qualitative change. Let’s now discuss the use of index numbers.
Use of Index Number
Before knowing about the index number, let’s discuss the use of the index number so that it will make a clear idea in your mind. Index numbers contribute in many ways like study of population in a country, birth and death rate among the animals, etc. Apart from that, it also helps in calculating changes in the standard of living of the people and measuring the price level in the market. It is also used in the field of production where the wage rate is dependent on the marketing price so with the study of price levels wage rates can be varied. Also, the Government policies are made by the index number. The price study through the index numbers reflects on the financial and economic policies made by the government of a country. Apart from this, it also helps in comparing countries based on their living standards, job opportunities, birth and death rates, etc.
Importance of Index Number
The use of index numbers are mainly used in economic studies and measure economic variations of a certain geographical location. The index number measures the level of variation over some time. When talking about economic study, money plays an important role. So the value of money keeps changing with time. It keeps increasing and decreasing which is inversely proportional to the price level prevailing in the market. A fall in the value of money will lead to a rise in price level and similarly, a rise in the value of money will result in a decrease in the price level. So these changes or variations can be measured with the help of index numbers. It is a technique of measuring the variations in a variable(s) with a period in a particular location. So now we have an idea about index numbers and the importance and use of index numbers. Now let’s discuss types of index numbers.
Types of Index Numbers
There are a lot of types of index numbers with all different usage. Let’s discuss each type in brief to have the best understanding.
- Simple Index Number- This type of index number measures the relative change in a single data variable by taking a base variable. They are only preferred for a single variable.
- Composite Index Number- A composite index number is a type of index number which mainly deals with a group of data or variables. It measures the average changes in a group or series of variables by taking a base. This type of index number is made from the variations in a group of items or variables.
- Quantity Index Number- A Quantity Index Number is a type of index number that measures the change in the physical numbers of goods manufactured, sold, or consumed. In other words, it measures the variations in physical items or groups of items.
- Price Index Number- A price index number measures or calculates the price of a good over two periods of time, where the prices can be both retail and wholesale. This type of index number plays an important role in understanding various business situations with time.
The Laspeyres Index?
The Laspeyres Index is a method to find out the consumer price index by calculating the variation or change in the price of goods to a base year price. The name was derived from its inventor, Etienne Laspeyres. In simple terms, it is a consumer price index which is used to calculate the prices of goods or services of a particular country with a base year. This method is also called the base year quantity weighted method. It is used to measure the general level of price and living cost in an economy to find out the inflation for generally one year.
The formula which is used under Laspeyres Index is :
Laspeyres Price Index =Σ (Pi,t) x (Qi, 0) / Σ (Pi,0) x (Qi,0) x 100
Where,
Pi, 0 is the price of a single item at a base year period.
Pi, t is the price of a single item in the current year(observational period).
Qi, 0 is the quantity of a single item at the base time taken.
i is the summation index.
Conclusion
Index numbers are the tools that measure the degree of economic variation over a period. They are mainly in the numerical form stated as a percentage as a base figure. They help us to know the variation or changes as compared to another period. So with this, we are concluding our guide article on Index Number.
