Introduction to Index Numbers Flashcards

Flashcards based on lecture notes covering definitions, history, features, types, economic significance, and construction steps of index numbers.

Index Numbers

Statistical tools that measure changes in an economic variable (or a group of variables) over a period of time.

Purpose of Index Numbers

They are used to study relative changes, not absolute levels.

Rice Vaughan

An early researcher who studied rising prices in England.

William Fleetwood

Author of Chronicon Preciosum (1707) who compared prices of commodities between 1440-1460 and 1686-1706.

Charles Dutot

A French scholar who created a simple aggregative index in 1735.

G.R. Carli

An Italian scholar who used an average of price relatives in 1764.

Spiegel's Definition of Index Number

An index number is a statistical measure designed to show changes in a variable or a group of related variables with reference to time, geographical location and other characteristics such as income, profession, etc.

Croxton and Cowden's Definition of Index Number

Index numbers are devices for measuring differences in the magnitude of a group of related variables.

Base Year

Serves as the reference year for comparison; it should be a normal year and not too far in the past.

Base Year Index Value

The standard baseline index value assigned to the base year, which equals $100$.

Price Index Number

Measures general changes in the prices of goods and compares the level of prices between two different periods (e.g., CPI, WPI).

Quantity Index Number

Measures changes in the level of output or physical volume of production (e.g., Agricultural production index, Industrial production index).

Value Index Number

Measures changes in the total value of commodities and is more informative because it considers both price and quantity changes.

Value Formula

The mathematical expression for commodity value, written as $\text{Value} = \text{Price} \times \text{Quantity}$ or $p \times q$.

Special Purpose Index Numbers

Indices constructed for specific objectives, such as Import-Export Index, Labour Productivity Index, and Share Price Index (Sensex, Nifty).

Index of Industrial Production (IIP)

An index analyzed over years to identify whether industry is growing or declining.

Dearness Allowance (DA)

Wage fixation for employees that is directly linked to the cost of living index.

Purpose of Index Number Step

The first step in constructing an index number, which involves clearly defining the objective, scope, and variable to be measured.

Selection of Items Step

The third step in constructing an index number, which involves choosing a representative set of commodities/items because including all items is impractical.

Selection of Price Quotations Step

The fourth step in constructing index numbers, requiring price collection from reliable and unbiased sources to ensure accurate results.

Choice of a Suitable Average Step

The fifth step in construction, commonly using Arithmetic Mean or sometimes Geometric Mean to combine values.

Assigning Proper Weights Step

The sixth step in construction where weights represent relative importance, using Quantity weights ($q$) or Value weights ($p \times q$).

Selection of an Appropriate Formula Step

The seventh step in construction where specific formulae are chosen based on purpose, such as Laspeyres' Index, Paasche's Index, or Fisher's Ideal Index.