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Index Numbers Defined

In its simplest form, an index number is nothing more than a relative number or a “relative” which expresses the relationship between two figures, where one of the figures is used as a base.”

For a proper understanding of the term index number, the following points are worth considering:

(1)    Index numbers are specialized averages.  Index numbers are used for purposes of comparison in situations where two or more series are expressed in different units or the series are composed of the different types of items.

(2)    Index numbers measure the net change in a group of related variables. Since index numbers are essential averages they describe in one single figure the increase or decrease in a group of related variables under study. The group of variables may be the prices of the specified set of commodities, the volume of production in different sectors, etc.

(3)    Index numbers measure the effect of changes over a period of time. Index numbers are most widely used for measuring changes over a period of time. We can compare agricultural production, industrial production, imports, exports, wages, etc., at two different times.

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