Why do we need an index number?
An index number is a statistical device that is used to measure the changes in the related variables. Its importance is explained in the following points:
1. To measure change in the price level
Index numbers measure and compare prices of different commodities with the help of Wholesale Price Index (WPI). It is widely used to measure the level of inflation in an economy.
2. To study a change in the standard of living
Index numbers help to assess the living standard of people. Cost of living index measures the relative cost of living over time. If the index number has a low value, then it implies that people have low standard of living and vice-versa.
3. Useful in planning and decision making
Index numbers serve as the most important tool for business communities for drafting various plans and designing various policies. It is useful for the government and the planners to work out inflation rate with the help of consumer price index.
4. To determine the level of production
Index number of Industrial Production measures changes in the physical volume of production. Also, the production index is an important indicator to ascertain the output level.
5. To help the government in framing policy.
Index numbers are of great help to the government to frame fiscal and monetary policies. The government formulates policies regarding inflation, trade, income, salaries and allowances.