Index Number Concept

Index Number Concept

Index number tells about the average change in a variable over the period of time or with respect of time.

Index Number Base

Index number (change) is calculated with respect of a base period. Base has fundamental importance in index number calculation and with the help of base comparison is possible.

Index Number Types

Index number can be classified into two types i.e. simple index number & composite index number. Single index number deals with single variable (calculated for single variable), while composite index number may be calculated for number of variables.

Index Number Construction Steps

Index number construction process involves four steps i.e. selection of commodities and their prices, selection of bases, section of average, and selection of weights.

1.    Selection of commodities

Index number construction first step is selection of commodities which are to be included for calculating index number for whole sale price. There is no hard and fast rule for such selection, however, there is a general principal for such selection i.e. larger is number greater would be the accuracy.

2.    Selection of Base

Index number construction second step is to select a base for index number. There are two methods of selection a base i.e. fixed based & Chain based method. In fixed base method a year is chosen as base which does not change over the life of index number, while in chain base method base changes i.e. immediately preceding year is regarded as base.

3.    Selection of average

Index number construction third step is to choose an appropriate average which includes arithmetic mean, geometric mean and median.

4.    Selection of weights

Index number construction last step is to choose an appropriate weight. Weights are used to identify relative importance of a commodity. There are two types of weights i.e. base year weighting & current year weighting.