Muhammad Ayaz

Roll Num 71
Topics = Index Number, Introduction, types, uses and
limitation
 Index number

Introduction
In business, managers and other decision makers may be concerned with the
way in which the values of variables change over time like prices paid for
raw materials, numbers of employees and customers, annual income and
profits, and so on. Index numbers are one way of describing such changes.
Index numbers were originally developed by economists for monitoring and
comparing different groups of goods.
Index number is a specific ratio which make the comparison easy.
Or
An index number measures how much a variable changes over time, we calculate
an index number by finding the ratio of the current value to a base value.
Index numbers are a series of number by which we can measure the relative
change in a variable or a group of variables for the purpose of comparison.
Index number may be constructed for a single commodity called simple
index number or for a group of commodities called composite index numbers.
Types of Index Numbers:
• Price index number:
a. Wholesale price index number.
b. Retail price index number.
c. Consumer price index number.

• Quantity index number:

• Aggregative type of index number:
 Uses of Index numbers
The first index number was constructed by an Italian, Mr G R Carli, in 1764
to compare the changes in price for the year 1750 (current year) with the
price level in 1500 (base year) in order to study the effect of discovery of
America on the price level in Italy.
• Index number are called economic barometers because they reveal the
changes in employment , production, cost of living.
• Used in economics, social sciences, business.
 Uses of Index numbers
• Index numbers are used in forescasting.
• The insurance companies use index numbers in fixing duration of life of
insured person and in fixing the rate premium.
• Extensively use in labour , commerce, industries.
• Index numbers help in formulating the decision and policies.
 Limitations of Index numbers
• Can not be use for all purposes.
• Different methods for calculating index number give different results.
• If sufficient care is not taken in selecting the commodities and their price
lists it may give wrong results.
• If a wrong base year is selected the results will be misleading.
• Is is difficult to include all commodities, we select only a sample of
commodities, therefore sampling errors occurs in the index number.