Example of Index Number
An illustration can help explain the concept of index numbers. Take a look at how prices are expected to rise in 2019. In this situation, there are three basic questions.
- First, in comparison to which year did prices rise in 2019?
- Second, how to respond when certain products’ prices increase more rapidly than others?
- Third, is there any standard unit or not in which the prices of different goods and services can be expressed? The price of milk can be expressed in terms of a rupee per liter, of cloth in terms of a rupee per meter, and sweets in terms of a rupee per kilogram.
All questions can be answered by studying index numbers.
- First, the rise in the prices in 2019 can be studied using the previous year, like 2015 or 2010 as the reference/base.
- Second, the index number suggests considering an average change. For example, if the price of potato rise from ₹100 to ₹200 and the price of onions rise from ₹100 to ₹300, then the average price is considered ₹250; i.e.,
- Third, the index number suggests considering only the percentage change. Thus, the unit of commodity losses its relevance.
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