What do index numbers mean

Index numbers are created to study the change in effects of factors that cannot be measured directly. The following quote comes from emathzone. However, we can study relative changes in business activity by examining the variations in the values of some of the factors that influence business activity, and which can be measured directly. One of the main difficulties when compiling an index is to determine what exactly to include in it, and what weight to give each thing.

Then there is the challenge of preventing that index from becoming obsolete — how to change it over time. Even the index numbers related to inflation need to be monitored regularly. Inflation measures are based on the price of a basket of goods that the typical consumer buys. Over time, the choice and quality of products in the basket change — the inflation index must take this into account. Economists spend a long time discussing and debating how to accurately apply these changes.

The production data of various industries are included in preparing these index numbers. Index numbers are used to measure all types of quantitative changes in different fields. In general, index numbers are very useful in a number of ways:. Index numbers are used to measure changes in the value of money or the price level from time to time. Changes in the price level generally influence production and employment of the country as well as various sections of the society.

The price index numbers also forewarn about the future inflationary tendencies and in this way, enable the government to take appropriate anti- inflationary measures. Index numbers highlight changes in the cost of living in the country. They indicate whether the cost of living of the people is rising or falling.

On the basis of this information, the wages of the workers can be adjusted accordingly to save the wage earners from the hardships of inflation. Index numbers are also useful in providing information regarding production trends in different sectors of the economy. They help in assessing the actual condition of different industries, i.

Importance in trade with the help of index numbers, knowledge about the trade conditions and trade trends can be obtained. The import and export indices show whether foreign trade of the country is increasing or decreasing and whether the balance of trade is favourable or unfavourable. Index numbers prove very useful to the government in formulating as well as evaluating economic policies.

Index numbers measure changes in the economic conditions and, with this information, help the planners to formulate appropriate economic policies. Further, whether particular economic policy is good or bad is also judged by index numbers. Index numbers are useful in almost all the fields. They are specially important in economic field.

Some of the specific uses of index numbers in the economic field are:. The index numbers prepared for one purpose cannot be used for another purpose. For example, the cost-of-living index numbers of factory workers cannot be used to measure changes in the value of money of the middle income group. Different countries include different items with different qualities and use different base years in constructing index numbers.

They do not provide accurate information. It may be possible that a general rise in the index is due to an improvement in the quality of a product and not because of a rise in its price. Article Shared by. Related Articles.

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Indexation Definition Indexation is a method of linking the price or value of an asset to a price or price index of some type to adjust for inflation. Real gross domestic product real GDP is an inflation-adjusted measure of the value of all goods and services produced in an economy.

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