INDEX NUMBERS; Purpose of Constructing, Definition, Features or Characteristics
🚩Timestamps:-
00:41 Session Agenda
01:58 concept of index number
11:02 what does the study of Index Numbers do?
12:26 Purpose of Constructing Index Number of (i) Prices, and (ii) Quantities
15:17 Definition of an Index Number
17:08 Features or Characteristics of Index Numbers
19:41 Concluding Remarks
Learning Outcomes:-
Through this module, you will gain understanding
on:-
1.
concept
of index number
2.
what
does the study of Index Numbers do?
3.
Purpose
of Constructing Index Number of (i) Prices, and (ii) Quantities
4.
Definition
of an Index Number
5.
Features
or Characteristics of Index Numbers
6.
Difficulties
or Problems in the Construction of Index Numbers
7.
Advantages
or Uses of Index Numbers
8.
Limitations
of Index Numbers
9.
The
Principal Limitations of Index Numbers
concept of index number
The concept of index
number can be best understood through illustration.
Let us consider a situation of rising prices during
the year 2014.
In this context, we are
faced with three basic questions.
1. First, compared to which year have the prices risen
during 2014?
2. Second, how do we handle the situation when the prices
of some goods rise more than the others?
3. Thirdly, can prices of different goods be expressed in
terms of any standard unit or different units are to be used to express prices
of different goods and services, such that the price of milk is to be expressed
in terms of rupees per litre, of cloth in terms of rupees per metre and of
sweets in terms of rupees per kilogram.
The study of Index Numbers answers all these
questions:
1. First, rise in prices during 2014 would be studied only
with reference to some previous years like 2001 or 2004. Otherwise, the mere
statement that prices during 2014 have tended to rise would make no sense.
·
2014 will be
treated as the current year and 2001 or 2004 (previous year) as the base year.
·
Prices during the
base year are taken as 100.
·
Prices during the
current year are related to the base year price. So that, we find out
percentage change in price level over the years.
·
Level of price is
called the index of price.
·
Since price of
the base year is assumed to be 100, we can say that index of price of the base
year is always 100.
·
If base year is
2004 and the price index is 100, and if in the year 2014, prices are doubled,
we shall conclude that the index of price in the year 2014 has shot up to 200
compared to 100 in the base year.
2. As regards the second
question (how do we handle the situation when prices of some goods change
more than the others), the study of index numbers suggests to take average
change.
·
Thus, if the
price of Potatoes has risen from 100 to 200 and the price of Onions has risen
from 100 to 300, we shall consider average change only, viz. 200+300/2 = 250
·
Thus, it is the
average index of prices for the various goods and services which is constructed
for different years, and compared with the base year.
3. Third, as regards the problem of expressing the prices of
various goods and services in some homogeneous units, the theory of Index
Numbers suggests to consider only percentage change in prices of various goods
and services. Once a change in price is expressed as a percentage change, the
unit of the commodity (like litre of a milk, or metre of a cloth) loses its
relevance.
Thus, what does the study of Index Numbers
do?
It helps us to find out
percentage change in the values of different variables (may be prices of
different goods or production of different commodities) over time with
reference to some base year which happens to be the year of comparison. When
various goods are studied simultaneously, the percentage change is taken as the
average for all the goods.
Purpose of Constructing Index Number of (i)
Prices, and (ii) Quantities
(i) Purpose of
constructing index number of prices is to know the relative change or
percentage change in the price level (made up of simple or weighted average of
the prices of different goods and services) over time.
·
A rising general
price level over time is a pointer towards inflation, while a falling general
price level is a pointer towards deflation. Both inflation as well as deflation
have notable consequences for an overall economic activity in the economy.
(ii) Purpose of
constructing index number of quantity is to know relative change or percentage
change in the quantum or volume of output of different goods and services over
time. This reflects the level of economic activity in the economy and its
different sectors.
·
A rising index of
quantity suggest a rising level of economic activity and vice versa.
Definition
1. In the words of Spiegel, "An Index Number is a
statistical measure designed to show changes in a variable or group of related
variables with respect to time, geographic location or other
characteristics".
2. According to Croxton and Cowden, "Index Numbers
are devices for measuring difference in the magnitude of a group of related
variables".
Features or Characteristics of Index Numbers
(1) Measures
of Relative Changes: Index numbers measure relative or percentage changes
in the variable(s) over time. Index number of prices, for example, is not
simply a statement of prices at different dates, it presents estimates of
percentage changes in the prices over years with reference to some selected
base year.
(2) Quantitative Expression: Index numbers offer a precise measurement
of the quantitative change in the concerned variable(s) over time The index
numbers are not the qualitative statements like prices are rising or falling.
3) Averages: Index numbers show changes in terms of averages.
Difficulties or Problems in the Construction
of Index Numbers
(1) Purpose
of Index Number: There are various types of index number constructed with
different objectives. Before constructing an index number, one must define the
objective. The construction of index number is significantly influenced by the
objective or purpose of the study. Thus, for example, if the objective is to
study the impact of change in the value of money on the consumers one should
construct consumers' price index number. If we are to study the impact of
change in the purchasing power of money on the producers, we shall construct
index number on the basis of wholesale prices. Haberler has rightly pointed out
that, "Different index numbers are constructed to fulfil different
objective and before setting to construct a particular index number, one must
clearly define one's object of study because, it is on the objective of the
study, that the nature and format of the index number depends."
(2) Selection of Base Year: Selection of Base Year is another problem in the construction of index number. Base year is the reference year. It is the year with which prices of the current year are compared. As far as possible, Base Year should be a normal year. That is, it should be the one without much ups and downs. Otherwise, the index values would fail to capture the real change in the variable. The year 2004-05 is treated as base year in India, at present.
(3) Selection of Goods and Services: Having defined the objective, the
problem is of the selection of goods or services to be included in the index
number. To construct the Consumers' Price Index, for example, all commodities
are not included. It is neither possible nor desirable to include all the goods
and services produced in the country. We have to choose those goods and
services which represent most of others in the market. In other words,
commodities selected should be such as are widely consumed, for example, rice,
milk, ghee, cloth, etc. Larger the number of goods and services more
representative is the index number.
(4) Selection
of the Prices of the Goods and Services: Having selected the goods and
services, the problem arises of prices to be selected. Broadly, in the construction
of Price Index, the problem is whether to adopt retail prices or wholesale
prices, controlled or open market prices. The choice would depend upon the
objective or purpose of the study.
(5) To
Find Out the Average Prices: In the construction of index number, base year
value is assumed to be 100 and other values of different years are related to
100. Thus, if cloth price is Rs 5 per metre in the base year and is found to be
Rs 10 per metre in the current year, the index of prices of cloth would be
10/5*100 = 200 for the current year. Likewise, price relatives for other
commodities are worked out and average for these price relatives is determined
and compared with the base year value of 100. It may be noted here that average
of base year remains 100, but the average of the year under investigation may
be more or less than 100. In case the average of the year under investigation
is more than the average of the base year, it means that general price level
has gone up. If it is less than the base year, it means that general price
level has gone down. Generally, base year is indicated as '0' and current year
as '1'. Price index is written as P01, and it is read as price index of year 1
in relation year 0.
(6) Selection of Method of Weighting: In working out the average price,
every care should be taken of the relative significance of different
commodities. While constructing index number, weights are accorded to different
commodities according to their relative significance. There are several methods
of according weight, e.g., Fisher's method, Paasche's method, Laspeyre's
method. While constructing weighted index number, one must justify his choice
of weighting technique in accordance with the nature and objective of his
study.
(7) Problem of Finding Average: In finding out average values,
different kinds of average may be used, geometric average, arithmetic average,
etc. The choice of average significantly influences the results. Different
kinds of averages may give different index number of a given change in price.
(8) Selection
of Formula: Index numbers can be constructed with the help of many
formulae, such as, Laspeyre's method, Paasche's method Dorbish and Bowley's
method, Fisher's method. One has to decide about the method to be used while
constructing the index number
Advantages or Uses of Index Numbers
(1) Measurement of Change in the Price Level or the Value of Money:
Most important use of index numbers is that index numbers measure the value of
money during different periods of time. We can use index numbers to know the
impact of the change in the value of money on different sections of the
society. Accordingly, devices or means can be worked out to correct
inflationary or deflationary gaps in the system.
(2) Knowledge
of the Change in Standard of Living: Index numbers help to ascertain the
living standards of people. Money incomes may increase but if index numbers
show a decrease in the value of money, living standards may even decline. Thus,
index numbers indicate change in real income.
|
Standard of living is
the level of income, comforts and services available, generally applied to a
society or location, rather than to an individual. Standard of living is
relevant because it is considered to contribute to an individual's quality of
life. a measure of how
comfortable the life of a particular person or group is जीवन-स्तर (किसी व्यक्ति या समूह के जीवन के सुख-सुविधा संपन्न होने की मात्रा) |
(3) Adjustments
in Salaries and Allowances: Cost of living index is a useful guide to the
Government and Private Enterprises to make necessary adjustments in salaries
and allowances of the workers. Increase in the cost of living index suggests
increase in salaries and allowances.
(4) Useful
to Business Community: Price index numbers serve as a useful guide to the
business community in their planning and decisions. Trend of the prices
significantly influence their production decisions
(5) Information Regarding Production: Index numbers of production shows
whether the level of agricultural and industrial production in the economy is
increasing or decreasing. Accordingly, agricultural and industrial development
policies are formulated.
(6) Information
Regarding Foreign Trade: Index of exports and imports provides useful
information regarding foreign trade Accordingly, export-import policies are
formulated.
(7) Useful to Politicians: Politicians come to know of the real
economic condition in the country on the basis of index numbers. They offer
constructive criticism of government's economic policies and give suggestions
for economic reforms in the country.
(8) Useful to Government: It is with the help of index numbers that the
government determines its monetary and fiscal policies and takes concrete steps
for the economic development of the country. In other words, with the help of
index numbers, government formulates appropriate policies to increase
investment, output, income, employment, trade, price level, consumption, etc.
Limitations of Index Numbers
(1) Not
Completely True: Index numbers are not fully true. For example, one can
only make an estimate of change in the value of money with the help of index
numbers. The index numbers simply indicate arithmetical tendency of the
temporal changes in the variable.
(2) International Comparison is not Possible: Different countries have
different basis of index numbers. These do not help international comparisons.
(3) Difference of Time: With the passage of time, it is difficult to
make comparisons of index numbers. With the changing times, man's habits,
tastes, etc., also undergo a change. Consequently, index numbers constructed on
the basis of old consumption pattern cannot be compared with the index numbers
constructed on the basis of new consumption pattern.
(4) Limited
Use: Index numbers are prepared with certain specific objective. If they
are used for another purpose they may lead to wrong conclusions. For example,
index numbers prepared to know about the economic condition of the teachers
cannot be used to know about the economic condition of the labourers.
(5) Lack of Retail Price Index Numbers: Most of the index numbers are
prepared on the basis of wholesale prices. But in real life, retail prices are
most relevant, but it is difficult to collect retail prices. Index numbers
based on wholesale prices may be misleading.
The Principal Limitations of Index Numbers
(i) there are no scientific techniques of
according weightage to different items included in the index numbers.
(ii) weightage to
different items often has a blend of personal bias.
·
bias, a strong
feeling of favour towards or against one group of people, or on one side in an
argument, often not based on fair judgement or facts - प्रायः किसी समूह के पक्ष अथवा विपक्ष में सहानुभूति, अथवा वाद-विवाद में किसी एक पक्ष के प्रति झुकाव जो तथ्यों पर आधारित नहीं; प्रायः एकतरफ़ा, पूर्वाग्रह, विशेष झुकाव, पक्षपात
(iii) owing to difference
in the unit of currency as well as difference in the composition of production
(and consumption) across different countries of the world, it is often very
difficult to construct Index Numbers that facilitate international comparisons.
VIDEO DESCRIPTION (max 5,000 characters)
concept of index number, what does the study of Index Numbers do?, Purpose of Constructing Index Number of (i) Prices, and (ii) Quantities, Definition of an Index Number, Features or Characteristics of Index Numbers | Index Numbers | 11th Commerce | by @statomics11comm
🗣️ आपके लिए, इस Session की "tuition fee" है केवल: 👉 video को like 👍 & SHARE 🚀 करना, अपने feedback को Comment 📝 करें; और सबसे ज़रूरी बात, Channel को SUBSCRIBE करके notification bell 🛎 icon को भी press करना ना भूलें ~XOXO
📚 CHAPTER PLAYLIST ►
Ch 13 – Index Numbers
https://www.youtube.com/playlist?list=PL0BlcnHQsq5IpDzZX6b37q9Wo2sAPyLiQ
Drop a comment 👇 if this video was useful 😍 If you like my work, please Like and Share🤍
- - - - - - - - - -
👉 SUBSCRIBE🔔 to the Channel here:
https://www.youtube.com/channel/UCwRkwAVFBOvj7pQ605aVpIw
----------------------------------------------------------------------------------
👋 CONNECT WITH me ►
📸 IG/@imggnlive
https://www.instagram.com/imggnlive/
📌 Email: amggndeep@gmail.com
~ आपके GGN Sir 😇
#statomics11comm #ggndeep8_ #imggnlive
sknahT for visiting my channel!
YOUR QUERIES ⁉️ -
- - - x - - -
TAGS (csv)
----------------------------------------------------------------------------------
🏷️ TAGS ►
concept of index number, what does the study of Index Numbers do?, Purpose of Constructing Index Number of (i) Prices, and (ii) Quantities, Definition of an Index Number, Features or Characteristics of Index Numbers
, Index Numbers
,commerce, business,
trade, class 11, 11 class, 11th, CBSE, hindi, English, statomics11comm, class
11th, statistics, economics, statistics for economics, 11th Commerce CBSE, 11th
Commerce, CBSE
Comments
Post a Comment
Your feedback is incredibly valuable to our team as we continuously strive to improve our platform and provide the best experience possible for our users. We also appreciate your constructive criticism and look forward to implementing improvements based on your suggestions.