Key Points

An index number is a statistical device for measuring changes in the magnitude of a group of related variables, such as prices or quantities, over time. It expresses these changes as a percentage of a base value.

The base period is the reference point for comparison, and its index value is always set to 100. A desirable base period should be a normal year, free from extreme events, and not too distant in the past.

A simple index number treats all items in the group as having equal importance. A weighted index number assigns specific weights to items based on their relative importance, providing a more realistic measure.

The simple aggregative method calculates a price index by dividing the sum of current period prices by the sum of base period prices, then multiplying by 100. Its main limitation is that it does not consider the relative importance of commodities.

Laspeyre's index is a weighted aggregative index that uses base period quantities (q0) as weights. Its formula is (ΣP1q0 / ΣP0q0) × 100.

Paasche's index is a weighted aggregative index that uses current period quantities (q1) as weights. Its formula is (ΣP1q1 / ΣP0q1) × 100.

The Consumer Price Index, also known as the cost of living index, measures the average change in retail prices of a specific basket of goods and services consumed by a particular group of people. It is used to adjust wages and salaries.

The Wholesale Price Index measures the change in the general price level of goods at the wholesale level. It is widely used to measure the headline rate of inflation in an economy.

The Index of Industrial Production is a quantity index that measures the changes in the volume of production in major industrial sectors like mining, manufacturing, and electricity. It indicates the growth of the industrial economy.

Sensex is the benchmark index of the Bombay Stock Exchange (BSE) in India. It reflects the performance of 30 large, well-established companies and indicates investor confidence and the overall health of the stock market.

Index numbers are crucial for economic policy making, wage negotiations, measuring inflation, and deflating economic data like national income to understand real changes by removing the effect of price changes.

Real wage reflects the purchasing power of money wages and is calculated using the formula: (Money Wage / Consumer Price Index) × 100. It shows how much goods and services one can buy.

Inflation is a sustained increase in the general price level. The rate of inflation is commonly calculated using the percentage change in the Wholesale Price Index (WPI) from one period to the next.

The purchasing power of money is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. It is calculated as the reciprocal of the cost of living index (1 / CPI).