Index numbers are statistical tools used to measure relative changes in a group of variables over time. They are essential for economic analysis, particularly for tracking inflation, production levels, and other economic trends. Key types include Price Index Numbers (like the Consumer Price Index - CPI), which measure changes in prices; Quantity Index Numbers, which measure changes in physical volume; and Value Index Numbers, which measure changes in the total value (Price x Quantity). The construction of an index number involves selecting a base year, choosing a representative 'basket' of items, assigning weights to these items based on their importance, and selecting an appropriate formula (e.g., Laspeyres', Paasche's, or Fisher's). While powerful, index numbers have limitations, as they are only averages and may not perfectly reflect changes in quality or consumption patterns.
- An index number is a statistical tool for measuring relative change.
- The base year is the reference period, with an index value of 100.
- The current year is the year for which the change is being measured.
- Price Index (e.g., CPI) measures inflation.
- Quantity Index (e.g., Index of Industrial Production) measures output changes.
- Value Index = Price Index x Quantity Index.
- Laspeyres' Index uses base year quantities as weights.
- Paasche's Index uses current year quantities as weights.