A large number of commodities are offered for sale in every country of the world. If we study the behavior of the prices of the commodities in any market, we will soon arrive at a conclusion that they do not move in unison. There is every possibility that prices of some commodities may be going up and other falling. Even when the prices of all the commodities are changing in one direction, the rate of change may not be uniform. The prices of some commodities may be rising or falling faster than other. Index number is a device or an instrument which measure the average price movements of a number of selected commodities. In the words of Thomas" the index number is a device that permits the measuring of the average behavior of a number of individual prices.
Index numbers of different types work like a barometer showing fluctuations I the magnitude of a phenomena from time to time. One of these index numbers is the index number prices by means of which one can measure the changes in the value of money. If in a particular period there is 100 percent increase in the index number of prices it means100 percent decrease in the purchasing power of money or value of money.
An index number percentage relative that compares economic measures in a given period with those some measure at a fixed time in the past
They are stastical devices designed to measures the relative change in the variables or group of related variables with respective yime or location
TYPES OF INDEX NUMBER
A)price index number
B)quantity index number
C)value index number
Index number is very useful device for measuring the relative changes in the value of money. It is equally important for measuring quantitative changes in any sector of the economy for the guidance and formulation of economic policies in the country. For instance, there may be index number of imports, exports, wages area under cultivation, changes in population, employment, industrial activity etc. the main use of index number are.
Index number serves as a barometer for measuring the value of money or its reciprocal, the prices of goods and services which can be purchased with the help of money.
The government and the people are very much concerned over changes in the value of money. The economic effects of the rise or fall in the purchasing power of the money have a direct bearing on the socio economic structure of the country. The government therefore, compiles different types of index numbers and formulates policies on the basis of their result.
Index numbers help in comparing the economic conditions of a group of people at two periods.If we are to know the true consumption standard of a class of people in locality we can compute index number for a particular section of the society only.