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Introduction to Index Numbers 📊

Index Numbers are often called the "Barometers of Economic Activity". They help us measure changes in a variable (or group of variables) over time.

What is an Index Number? 🤔

[!NOTE] Definition: An Index Number is a statistical measure designed to show changes in a variable or group of related variables with respect to time, geographic location, or other characteristics.

Simply: It tells you by how much something has changed compared to a base period.

  • Example: If the Price Index of petrol is 150 today compared to 100 in 2020, it means petrol prices have increased by 50%.

Characteristics of Index Numbers 🧐

  1. Specialised Averages: They are averages that can be used to compare data expressed in different units (e.g., comparing price changes of Rice (kg), Cloth (meters), and Milk (litres)).
  2. Measure Net Change: They show the overall or net change in a group of variables.
  3. Base Year: Changes are always measured against a fixed period called the Base Year (usually denoted as 100).
  4. Percentage based: The results are expressed in percentages, but the % sign is usually omitted.

Uses of Index Numbers 🌟

  1. Measuring Inflation: The Consumer Price Index (CPI) tells us how much the cost of living has gone up.
  2. Wage Fixation: Salaries and Dearness Allowance (DA) are adjusted based on the Cost of Living Index.
  3. Economic Policy: Helps the government decide on tax rates, export-import policies, etc.
  4. Purchasing Power: Helps to find the real value of money. As the price index goes up, the value of money goes down.
  5. Forecasting: Helps businesses predict future trends.

Key Terms 🗝️

  • Base Year (0): The year with which comparison is made. It should be a normal year (no wars, floods, etc.).

  • Current Year (1): The year for which we want to find the index number.

  • Price Relative (P): The price of current year expressed as a percentage of base year price.

    P = (p1 / p0) * 100

Summary

  • Index Numbers measure relative changes over time.
  • They are tools for decision making in economics and business.
  • Always expressed relative to a Base Year (100).

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