Rules of Index Numbers

In statistics, an index number is a technique used to measure the difference in relative changes across time. The distinction can also vary by location. It can be considered as the arithmetic means by which we find or express some values in each data set.

Rules for index numbers

Index numbers are used to assess changes in the effects of elements that cannot be explicitly defined. The general price level, for example, is a hypothetical word that cannot be measured directly. However, by monitoring relative changes in the price level of different commodities, the index number technique can be used to gain an understanding of relative changes in the total level of prices.

The index number technique quantifies changes in a single variable or a set of linked variables. One variable, for example, could be the price of wheat, while another set of variables could be the prices of sugar, milk, and rice.

The index number approach is used to compare the levels of an event on a specific date to their values on a previous date (e.g., the price level in 1980 compared to that in 1960 chosen as the foundation year) or the levels of a phenomenon from different locations on the same day (e.g., the price level in India in 1980 in comparison with that in other countries in 1980).

Index Number Restrictions

Index numbers have many advantages, but to some extent, this is where their limitations emerge. Index numbers have the following limitations:

• Since index numbers are derived from samples, there is a possibility of mistakes. These samples are assembled after careful consideration, which increases the possibility of errors. It can also be found in weights, base periods, and so on.

• Index number is always calculated based on goods. Items chosen in this manner may or may not be in trend, resulting in an erroneous analysis.

• Index numbers can be generated using a variety of methods. Thus, the outcomes may present a varied set of values, adding to the confusion.

• The index numbers are approximations of the relative changes that occur. Furthermore, changes in variables that are compared over a long period may be unreliable.

Index Number Varieties

Index numbers come in a variety of shapes and sizes, each having a specialised application. To find out, we’ll look at various index numbers. This lesson on the many types of index numbers will assist students in understanding the significance of each type in connection to the task at hand.

• Value index number

A value index number is calculated by dividing the aggregate value of a given period by the aggregate value of the base period. The value index is utilised for many things, including inventories, sales, and international trade. 

• Quantity index number

A quantity index number is used to compute changes in the volume or quantity of products produced, consumed, and sold over a specific period. It illustrates the relative change over time.

• Inflationary measure/price index number

A price index number is used to determine how much a price fluctuates over time. It will display the relative value as opposed to the absolute value. The Consumer Price Index and the Wholesale Price Index are two price indices.

Various Uses of Index Numbers in Statistics

• Internal Trade: The study of wholesale pricing indices for consumer and industrial goods, as well as industrial production, aids commerce and industry in increasing or contracting internal trade.

• Standard of Rent: Statistics on the cost-of-living index for several types of workers give insight here on the rise or decrease in workers’ real earnings. Based on a study of the cost-of-living index, money earnings are established, and penalty rates and other concessions are given to personnel. The cost-of-living index is often used in contract talks and the process of performing.

• External Business: A country’s external trade situation can be determined using its export and import indexes. These indexes show whether the country’s overseas trade is expanding or falling.

• Financial Policies: Index data allow the government to design and implement sensible economic policies. ICT systems are used to measure prices, incomes, salaries, manufacturing, work opportunities, product lines, export earnings, imported food, etc. The government can establish the current path of economic action by comparing size index figures across periods and enacting price, global trade, and overall economic policies accordingly.

Index Number Applications in Statistics

Index numbers are important in a wide range of studies, from elementary to advanced. It is used in the basic research of a country’s human population, as well as to assess the extinction rate of rare animals in a certain region. Let us look at some other uses for index numbers:

• It aids in determining changes in the standard of living as well as the level of prices.

• Wage rate regulation corresponds to changes in the price level. Wage rates may be updated because of the calculation of price levels.

Conclusion

Thus, index numbers are used to quantify all forms of quantitative changes in agriculture, industry, and commerce, as well as economic magnitudes such as earnings, employees, exporters, importing, pricing, etc.