Index Numbers
What an index number is
Read an index number against its base period.
Prices of different things change by different amounts: rice may rise 10%, onions 40%, while mobile data gets cheaper. How do we sum up the overall change? An index number measures the average change in a group of related variables between two situations: two times, or two places.
One period is chosen as the base period, and its index is set at 100. Every other value is read against it. An index of 150 means the value is 1.5 times the base, that is, 50% higher; an index of 90 means it is 10% lower. India uses 2011-12 as the base year for several of its main indices.
Index numbers are of two main kinds:
- Price index numbers measure changes in prices.
- Quantity index numbers measure changes in physical volume, such as production or employment.
Why do they matter? Suppose a worker's money wage has risen many times over the years. That does not mean the worker lives many times better, because prices have risen too. To know the real change, we must compare the wage with an index of prices.
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