What Are Index Numbers? What Are The Uses Of Index Numbers?

Index number is a device, which is designed to measure changes in a variable or group of related variables with respect to time, geographic location or other characteristic, which cannot be measures directly. Index number may be simple or composite.
Simple index number is computed to measure a relative change in single variable with respect to a base. Composite index number is computed to measure average change in a group of related variables with respect to base.

There are some uses of index numbers. To measure the average change in retail or wholesale prices or commonly or a group of commodities. To measure change in volume or quantity of goods produced or goods imported or exported. Index numbers are used to measure changes in a cost of living or total industrial production. The cost of living index numbers or consumer price index number is used to measure the effect of rise of fall prices on the general standard of living. Index numbers are used for forecasting. Index numbers are used to measure changes in qualitative expression like intelligence. Index number is also used to evaluate the purchasing power of money.

Following are the main uses:
A Barometer:
Index numbers serve as a barometer for measuring the value of money. With the help of index number we can easily make a comparison in the value of money in different years.
Importance for the Govt.:
The change in the value of money has a direct effect on the life of the public. So the Govt. adopts the fiscal and monetary policy according the results of index numbers.
Throws Light on Economic Condition:
Index numbers are very helpful in comparing the economic conditions of a particular group at two different periods.

Consumption Standard:
If we want to know the true consumption standard of a class in a locality we can compute the consumption index number.
Fixation of Wages:
The money wages can be revised according the proportionate charge in the cost of living. The cost of living index number guides the Govt. and the executives for the fixation and revision of wages.

Importance for the producer:
Price Index Number indicates the producer that he should expand the production or he should reduce the production. If price level is rising it means profit rate is high.
Analysis of Industry:
If we want to judge the prospects of manufacturing concerns the investment index number can be constructed, to know the net yield of the industrial sector.