❖ Basics of index numbers:

1. History and Background of Index Numbers:

The concept of index numbers dates back to the late 18Th century
when British economist Sir William Petty used them to compare
the economy of different countries. Index Numbers became
popular in 19th century with the rise of industrialization. The first
index number was constructed in the year 1764, by an Italian
named Carli.
The first official Index Numbers were published by British
government in 1862, which measured changes in prices of basic
goods such as wheat, coal and iron.
After some time countries such as US and Germany started
making their own index numbers.
2. Introduction
Almost everything changes over a period of time, the degree of
change that has occurred must be determined and defined. In
order to measure that change, we use a statistical technique
called Index Number. Index Numbers are usually published on a
regular basis by federal government and business publications. 3.
Definition:
According to Croxton and Cowden, Statistics may be defined as
the science of collection, presentation, analysis and interpretation
of numerical data.
 Examples:
• If a university wants to measure its current year
performance compared to the previous years, the technique of
index numbers is used.
• Human development index (HDI) and Word happiness index
are prominent examples of index numbers used to measure the
wellbeing, happiness and quality of life in a country. To measure
the changes in prices of goods and services that households buy,
we use a technique called Consumer Index Price.
❖ Practical Application of Index Numbers:
Index numbers are important in various fields and have several
practical applications:
1. Measure Inflation: Index numbers are used to determine
rate of inflation by measuring changes in prices of goods and
services which are helpful for businessmen, policy-makers and
general public.
2. Compare performance: Index numbers help in measuring
performance of a sector and determines how well it is performing
relative to its peers.
3. Resource Allocation: Index numbers are used in resource
allocation especially in cost benefit analysis.
4. Wage Adjustments: Index numbers helps in determining
wages for employees in various sectors especially where there is
inflation.
5. Setting Prices: Index numbers are used to determine the
prices of goods and services especially when cost of production
changes. 6. Planning & forecasting: Index numbers are used in
forecasting and planning such as predicting economic growth and
estimating future demands for goods and services.
❖ Index number and statistician: Index numbers are a
statistical tool that help statisticians to measure changes overtime
and across different groups. Statisticians use index numbers to
measure changes in various economic, social and other variables
such as prices, income, production, employment, population and
so on.
For example, a statistician wants to measure the change in price
level of a basket of goods overtime, they can use an index number
such as CPI. By comparing CPI of different periods the statisticians
can determine whether prices have increased or decreased
overtime and by how much time. Statisticians can use index
numbers to adjust effects of inflation, exchange rates and other
factors that may distort. Overall index numbers are a valuable
tool to measure and compare changes in complex and dynamic
system overtime which can help in many important decisions.
❖ Types of Index Numbers: There are two types of Index
Numbers:
1. Simple Index Numbers
2. Weighted Index Numbers Simple Index Numbers: A simple
index number is constructed from a time series concerning a
single commodity . It is also called Un-weighted Index
Number . It is further of two types:
a. Simple aggregative
b. Simple average of price relative.
Weighted index Number: All the commodities cannot be given
equal importance, so we can assign weights to each commodity
according to their importance and the index number computed
from these weights are called as weighted index number. The
weights can be production, consumption values. A consumer
price index (CPI) is usually calculated as a weighted average of the
 price change of the goods and services covered by the index. The
two types of weighted index number is :
a. Weighted Aggregate
b. Weighted Average of price relative.
Weighted aggregate is further sub-divided into three types:
I. Laspeyre’s method
II. Paasche’s method
III. Fischer’s method.

1. Use of Index Numbers in Various Fields:

1. Use of Index Number in Statistics:
An index number in statistics is a tool that we generally use to measure the
difference in relative changes from time to time. The difference can also be
from place to place. It can be thought of as the arithmetic mean that we
use to find or represent some values of a particular data set.
2. Use of index number in Medicine:
The Medical Records Indexing instead of paper records are being used for
recording the data of patients and their treatment such as demographics,
medications, reports, medical history etc. It provides complete, timely
information of the patient and makes it easier for the medical staff to
assess it.
3. Use if index number in Economics:
Index Numbers are used as economic barometers. They help in
formulating suitable economic policies and planning. It reflects price or
quantity compared with a base value. They are also used to evaluate the
purchasing power of money.
4. Use of Index Number in Business:
In business, an index is an information source that can be used by
corporate decision-makers to observe trends over time. They are used to
study trends and tendencies. Businessmen need to know the trends in the
 market to make decisions about wage rate, price of products, price of raw
materials etc.
 Limitations of Index Numbers:

Index numbers are useful in practice. However they suffer from certain
limitations.

Not completely reliable.

1) Based on samples:

Index numbers are generally based on samples. We cannot include all

the items in the construction of the index numbers. Hence they are not
free from sampling errors.

2) Bias in the data:

Index numbers are constructed on the basis of various types of data

which may be incomplete. There

May be bias in the data collected. This is bound to affect the results of
the index numbers.

3) Misuse of Index Numbers:

Index numbers can be misused. They compare a situation in the current
year with a situation in the base

Year. Hence a person may choose a base year which will be suitable for
his purpose. For example, an index numbers can be misused. They
compare a situation in the current year with a situation in the base
year. Hence a person may choose a base year which will be suitable for
his purpose. For example, a businessman. May choose a year in which
his profit is high as the base year and show that his profit is falling in
the current years.

4) Defects in formulae:

There is no perfect formula for the construction of an index number. It

is only an average and so it has all

The limitations of an average.

5) Changes in the economy:

The habits, tastes and expectations of the people in a country are

always changing and all these changes cannot be included in the
estimation of index numbers
 6) Qualitative changes:

The price or quantity index numbers may ignore the changes in

qualities of the products. At any given time, a better quality commodity
will have a higher production cost and a higher price than an ordinary
commodity which is a substitute for the better product.

7) Arbitrary weights:

The weights assigned to different commodities may be arbitrary.

8) Limited scope:

An index number has limited scope because if it is constructed for one

purpose then it cannot be used

For any other purpose..