Index Numbers — Class 11 Economics

An index number is a statistical device for measuring the average change in the magnitude of a group of related variables over two situations, usually expressed as a percentage of a base period whose value is taken as 100. An index of 250 means values are two-and-a-half times those of the base year. Index numbers measure changes in prices (price index) or in physical volume (quantity index). They are constructed by the aggregative method or the method of averaging relatives, and may be unweighted or weighted. A simple aggregative price index is , but giving every item equal weight is its main limitation. Laspeyre's index uses base-period quantities as weights, , while Paasche's index uses current-period quantities, ; they differ only in the weights chosen. Important official indices include the Consumer Price Index or cost-of-living index, which tracks retail prices for a group such as industrial workers; the Wholesale Price Index, which reflects the general price level of goods and underlies "headline" inflation; and the Index of Industrial Production, a quantity index. The Sensex is the Bombay Stock Exchange's sensitive index of 30 stocks. Index numbers help compute the purchasing power of money (the reciprocal of the cost-of-living index) and real wages (money wage divided by the cost-of-living index, times 100). Choosing a normal base year, representative items and the right formula are key issues in construction.