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current period. It is denoted by the suffix ‘1’. • Consumer Price Index
Notations • Wholesale Price Index
p = Price of the commodity in the base year • Index of Agricultural Production
0
p = Price of the commodity in the current • Index of Industrial Production
1
year • Index of Service Production
• Index of Export/Import
q = Quantity of the commodity consumed
0 • Human Development Index
or purchased in the base year
q = Quantity of the commodity consumed
1 Significance of Index Numbers in Economics :
or purchased in the current year Index numbers are indispensable tools of
economic analysis. Following points explain the
Types of Index numbers :
significance of index numbers :
PRICE INDEX NUMBER
1) Framing suitable policies : Index numbers
INDEX QUANTITY INDEX NUMBER provide guidelines to policy makers in
NUMBERS VALUE INDEX NUMBER framing suitable economic policies such
SPECIAL PURPOSE INDEX NUMBER as agricultural policy, industrial policy,
fixation of wages and dearness allowances
1) Price Index Number : It measures the in accordance with the cost of living etc.
general changes in the prices of goods. It
compares the level of prices between two 2) Studies trends and tendencies : Index
different time periods. numbers are widely used to measure changes
in economic variables such as production,
2) Quantity Index Number : It is also called prices, exports, imports etc. over a period of
volume index number. It measures changes time. For example, by examining the index
in the level of output or physical volume of of industrial production for the last five
production in the economy. For example, years, we can draw important conclusions
changes in agricultural production, industrial about the trend of industrial production
production etc. over a period of time.
whether it shows an upward tendency or a
3) Value Index Number : The value of a downward tendency.
commodity is the product of its price and 3) Forecasting about future economic
quantity (p × q). Value index number activity : Index numbers are useful for
measures the changes in the value of a making predictions for the future based on
variable in terms of rupee. It is a more the analysis of the past and present trends
informative index as it combines both, in the economic activities. For example,
changes in the price as well as quantity.
based on the available data pertaining to
4) Special Purpose Index Number : They imports and exports, future predictions can
are constructed with some specific purpose. be made. Thus, forecasting guides in proper
For example, import-export index numbers, decision making.
labour productivity index numbers, share 4) Measurement of inflation : Index numbers
price index numbers etc.
are also used to measure changes in the
Do you know? price level from time to time. It enables
Some of the widely used index numbers the government to undertake appropriate
by the Government of India : anti-inflationary measures. There is a
legal provision to pay the D.A. (dearness
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