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Index Numbers

INTRODUCTION 

1. An index number is a method of evaluating variations in a variable or group of variables in regards to geographical location, time, and other features. 

2. The base value of the index number is usually 100, which indicates price, date, level of production, and more.

3. Here, The value of money is not constant, even if it falls or rises it will affect and change the price level. E.g.  

Price Level ↑ • Money Value ↓
Price Level ↓ • Money Value ↑


BASIC TYPES OF INDEX NUMBER 

1. Price index number: evaluates the relative differences in costs between two particular points in time.

2. Quantity index number: measures the differences in the physical quantity of the product’s manufacturing, buying, or selling of one item or a group of items.


FEATURES

1) Expressed in percentage.
2) Relative measures or measures of net changes.
3) Measure change over a period of time or in two or more places.
4) Specialised average.
5) Measuring changes that are not directly measurable.

USES OR ADVANTAGES 

1) Help in formulating policies.
2) Help in study of trends
3) Helpful in forecasting
4) Facilitates comparative study
5) Measurement of purchasing power of money to maintain standard of living.
6) Act as economic barometer.

LIMITATIONS

1) Difficulty in construction of index numbers
2) Based on sample items, so only approximate indicators.
3) Ignores quality of commodities
4) Limited use.
5) Useful only for short-term comparison.





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