Index Number Case Study

Case Study
Importance of Index Number:

Index numbers are most commonly used in the study of the
economic status of a particular region. As mentioned, the
index number defines the level of a variable relative to the
level in a particular period of time span. These index numbers
serve as a measure to study the change in the effects of all
the factors that cannot be measured or estimated on a direct
basis. Thus, Index numbers occupy an important place due to
their efficacy in measuring the extent of economic changes
across a stipulated period. It helps to study such changes'
effects due to factors that cannot be directly measured.
Features and Characteristics of Index Numbers:
The main highlighting features of index numbers are
mentioned as below–It is a special category of average for
measuring relative changes in such instances where absolute
measurement cannot be undertaken Index number only
shows the tentative changes in factors that may not be
directly measured. It gives a general idea of the relative
changes The method of index number measure alters from
one variable to another related variable It helps in the
comparison of the levels of a phenomenon concerning a
specific date and to that of a previous date It is
representative of a special case of averages especially for a
weighted average Index numbers have universal utility. The
index that is used to ascertain the changes in price can also
be used for industrial and agricultural production.
Types of Index Numbers
There are various types of index numbers that have
particular usage. We will study the types of Index numbers to
know the same. This section which is related to the types of
Index numbers will help the students to understand the
importance of each type in regard to the task which is
practiced for.
Value Index:
A value index number is formed from the ratio of the
aggregate value for a particular period with that of the
aggregate value that is found in the base period. The value
index is utilized for inventories, sales, and foreign trade,
among others.
Quantity Index:
A quantity index number is used to measure changes in the
volume or quantity of goods that are produced, consumed,
and sold within a stipulated period. It shows the relative
change across a period for particular quantities of goods.
Index of Industrial Production (IIP) is an example of Quantity
Index.
Price Index:
A price index number is used to measure how price alters
across a period. It will indicate the relative value and not the
absolute value. The Consumer Price Index (CPI) and
Wholesale Price Index (WPI) are major examples of a price
index.
Advantages of Index Number:

The advantages of Index numbers are directly linked with
their usages. So the summation advantages are studies as
under:
 It adjusts primary data at varying costs, which is useful
for deflating. It facilitates the transformation from
nominal wage to real wage.
 Index numbers find extensive usage in economics and
help in the framing of appropriate policies. Such findings
help with the establishment of researches as well.
 It helps in the case of trends such as drawing outcomes
for irregular forces and cyclical forces.
 Index numbers can be leveraged in case of future
development of activities in the economic sphere. This
time series analysis is utilized for the determination of
trends and cyclical developments.
 The number is useful in measuring the changes that take
place in the standard of living in different countries over
an established period.
Limitations of Index Number:

We know everything existing has both advantages and
limitations. Index numbers have a lot of advantages, but to
an extent, this is when their limitations creep up. The
limitations of index numbers are as follows:
 There are chances for errors given that index numbers
come as a result of samples. These samples are put
together after deliberation, which creates chances for
errors. It can also be found in weights or base periods
etc.
 It is always calculated based on items. Items that are so
selected may not exactly be in trend, which in turn
creates an inaccurate analysis. Multiple methods can be
used to formulate index numbers. Due to this
multiplicity of methods, outcomes may bring forward a
different set of values which may further lead to
confusion.
 The index numbers show the approximate indications of
the relative changes that occur. Moreover, the changes
in variables that are compared over a prolonged time
may fall short on reliability.
 The selection of representative commodities may be
skewed. It is since these commodities are based on
samples.
Importance of Index Number in Management
Decisions:
1: In measuring changes in the value of Money:

Index Numbers are used to measure changes in the value of
money. A study of the rise or fall in the value of money is
essential for determining the direction of production and
employment to facilitate future payments and to know the
changes in real income of different groups of people at
different places of people and time.
2: In Cost of Living:
Cost of living index number in the case of different groups of
workers throe light on the rise or fall in the real income of
workers. It is on the basis of the study of the coat of living
index that money wages are determined and dearness and
other allowances are granted to workers.
3: In Analysing Markets for Goods and Service:

Consumer price index numbers are used in analysing markets
for particulars kinds of good sand service. The weight
assigned to different commodities like food, clothing, fuel,
lighting house rent etc., govern and market for such goods
and services.
4: In Internal Trade:
The study of indices of the wholesale price of consumer
goods and industrial goods and of industrial production helps
commerce and industry in expanding or decreasing
international trade.
5: In External Trade:
The foreign trade position of a country can be accessed on
the basis of its export and import indices. These indices
reveal whether the external trade of the country is increasing
or decreasing.
6: In Economic Policies:
Index number are helpful in the state in formulating and
adopting appropriate economic policies. Index number
measures changes in such magnitude as price, income,
wages, production, employment, products, export, import
etc.
7: In Determining the Foreign Exchange Rate:

Index numbers of wholesale price of two countries are used
to determine their rate of foreign Exchange. They are the
basis of the purchasing power of parity theory which
determines the exchange rate between two countries on
inconvertible paper standard.
Thank you!

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Case Study

Importance of Index Number:

Advantages of Index Number:

Limitations of Index Number:

1: In measuring changes in the value of Money:

3: In Analysing Markets for Goods and Service:

7: In Determining the Foreign Exchange Rate:

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