CBSE Class 11 Economics Introduction To Index Numbers Notes Set A

Definitions of Index Numbers : -

In the words of Edge worth, ‘Index number shows by its variation the changes in a magnitude which is not susceptible either of a accurate measurement in itself or of direct valuation in practice.’

In the words of Tuttle, ‘ An index number is a single ratio (usually in percentage)which measures the combined (i.e., averaged) change of several variables between two different times, places or situations.’ 

Features/Characteristics of Index Numbers:-

Index numbers are specialized averages.

Index numbers are expressed in percentages.

Index numbers measure the effect of changes in relation to time or place.

PROBLEMS IN CONSTRUCTION OF INDEX NUMBERS:-

√ Purpose of Index Numbers.

√ Selection of Base Year. Base year is the reference year. It is the year with which price of the Current year are compared.

(i) The base period should be a normal year.

(ii) The difference between base year and current year should not be too long.

(iii) Fixed Base or Chain Base.

√ Selection of number of goods and services.

(i) The commodities selected should be representative of the tastes, habits and customs of the people for whom the Index is meant.

(ii) The total number of items should be neither too small nor too large, because if it is too small, then the index number will not be representative and if it is too large, the more representative shall be the index but at the same time the greater shall be the cost and the time taken.

(iii) The standardized or graded commodities should be selected to arrive at meaningful and valid comparisons.

(iv) Selection of Prices of the goods and services (Price Quotations)

V) There are two methods, in which price can be quoted:- (Price Quotations)

(i) Money prices

(ii) Quantity prices

√ Selection of the Average 

V) Selection of appropriate weights : - There are several Methods of according weight i.e.

(i) Fisher’s Method (ii) Paasche’s Method (iii) Laspeyre’s Method.

Vi) Selection of an appropriate Formula Index numbers can be constructed with the help of the many Formulae.

Such as : (1) Laspeyres Method. (2) Paasche’s Method

(3) Fisher’s ideal Method.

TYPES OF INDEX NUMBERS:-

i) Consumer Price Index (CPI) (iv) Index of Agricultural Production

ii) Wholesale Price Index (WPI) v) Sensex (Stock Market)

iii) Index of Industrial Prodution (IIP)

Price Index Numbers:-

i. Wholesale Price Index Numbers The wholesale price index number reflects the general price level for a group of items taken as a whole. In India, it is the most popular price index used in the business industry and policy market. It acts as an indicator of the rate of inflation.

ii. Retail Price Index Numbers The retail price index number reflects the general changes in the retail prices of various items including food, housing, clothing, and so on. The Consumer Price Index, a special type of retail price index, is the primary measure of the cost of living in a country. 

METHODS OF CONSTRUCTING PRICE INDEX NUMBERS

i. Unweighted Index Numbers

ii. Weighted Index Numbers.

iii. Both of these methods of constructing index numbers are further classified as:

(i) Aggregative Method;

(ii) Average of Relatives Method.

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