Important index numbers and their uses

India's important index numbers:

• Wholesale Price Index (WPI): wholesale prices of goods only (no services). It is used to measure headline inflation. Its weights: primary articles 22.62, fuel and power 13.15, manufactured products 64.23.
• Index of Industrial Production (IIP): a quantity index, measuring changes in the volume of industrial output. It is a weighted mean of quantity relatives, weighted by value added; manufacturing has the biggest weight (77.6). Its eight core industries carry a weight of 40.27.
• Sensex: the index of 30 large companies' shares on the Bombay Stock Exchange, with base year 1978-79 (value 100 on 1 April 1979). It guides investors on how the share market is doing. (The Nifty is the other well-known share index.)

Building a good index raises several issues: a clear purpose; representative items (prices taken from typical places and shops); a base year that is normal (free of wars, floods and other extreme events) and recent; the right formula; and reliable data.

Two important uses of the CPI:

• Purchasing power of money = 1 ÷ CPI (with the CPI as a ratio to the base; or 100 ÷ CPI). If the CPI is 125, one rupee now buys only what 80 paise bought in the base year.
• Real wage = money wage ÷ CPI × 100. A worker earning ₹30,000 when the CPI is 150 has a real wage of 30,000 ÷ 150 × 100 = ₹20,000 at base-year prices.

So, to see what money really buys, divide by the CPI. The CPI is also used to adjust salaries (dearness allowance) and to guide government policy on prices.