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SSC Online Preparation: Index Number

The index number is a technique in statistics to measure changes in the economic variable or variables concerning time. It is used in economics to measure trends in areas like the stock market, money market, export, import, etc.

Characteristics of Index Number:

•  It measures the change in the data set.
• These measures change over a while.
• These are a particular average.
•   Index numbers can help to weigh factors on a theoretical basis.
• This technique is used in comparisons of different data sets over time.

Types of Index Number:

• Simple Index Number: This is constructed for a single variable or object only.
• Composite Index Number: This is constructed for multiple different items. It is built by measuring an average relative change in multiple comparable variables.
• Price Index Number: This measure relative changes in the price of a commodity over some time. They describe a business environment. There are the following two types of price index number available:

1. Wholesale Price Index Numbers: These are measured based on wholesale prices of certain critical raw materials and semi-finished goods. The sample basket includes important commodities, as well as price sensitive.

2.  Retail or Consumer Price Index Number: This is measured based on retail prices of final consumer goods. Here fluctuations are very high.

3.  Quantity Index Number: This is measured in terms of changes in the number of products produced or consumed physically.

4.  Industrial Index Number: These are constructed to measure the change in industrial production over time.

5.  Wage Index Number: It is estimated to find the differences in the wages of workers over some time.

6.  Cost of Living Index Number: These are measured based on the essential goods and services consumed by ordinary people.

Methods of constructing Index Number:

There are two methods of building the index number. These are as follows:

1.  Aggregation Method: 

2.  Relative Method

For Example:

There are two commodities, A and B.

Price of Commodity A in base year=20

Price of commodity B in support year=15

Amount of commodity C in bottom year=10

Price of commodity A in current year= 25

Price of commodity B in current year= 15

Price of commodity C in current year=10

Then

Price Index= *100

                 = *100

                  = 111.111

Importance:

• It is easy to make comparisons based on the index.
• It may be used in the simplification of facts.
• This method is used for forecasting purposes.
• Index number has its application in academics as well as industry. 
• It helps in understanding business or market trends.
• It is the basis of different government policies.

Limitations:

• The computation process is complicated.
• Index numbers can be used to represent data within the country itself because every other country takes a different base year and different commodity basket for index number calculation.
• This method considers the quantity of any commodity. But the consumption of a product also depends on the quality of merchandise.

All the best to All the aspirants of SSC 2020 !