Q 5 Explain in detail the different types of index numbers, and what are uses of index numbers?

? Answer 5 - Introduction Index numbers are today one of the most widely used statistical indicators. Generally used to indicate the state of the economy, index numbers are aptly called barometers of economic activity. Index numbers are used in comparing production, sales or changes exports or imports over a certain period of time. The role-played by index numbers in Indian trade and industry is impossible to ignore. It is a very well known fact that the wage contracts of workers in our country are tied to the cost of living index numbers. What is an Index Number? By definition, an index number is a statistical measure designed to show changes in a variable or a group or related variables with respect to time, geographic location or other characteristics such as income, profession, etc. What are the characteristics of an Index Numbers? 1. These are expressed as a percentage: Index number is calculated as a ratio of the current value to a base value and expressed as a percentage. It must be clearly understood that the index number for the base year is always 100. An index number is commonly referred to as an index. 2. Index numbers are specialized averages: An index number is an average with a difference. An index number is used for purposes of comparison in cases where the series being compared could be expressed in different units i.e. a manufactured products index (a part of the whole sale price index) is constructed using items like Dairy Products, Sugar, Edible Oils, Tea and Coffee, etc. These items naturally are expressed in different units like sugar in kgs, milk in liters, etc. The index number is obtained as a result of an average of all these items, which are expressed in different units. On the other hand, average is a single figure representing a group expressed in

the same units. 3. Index numbers measures changes that are not directly measurable: An index number is used for measuring the magnitude of changes in such phenomenon, which are not capable of direct measurement. Index numbers essentially capture the changes in the group of related variables over a period of time. For example, if the index of industrial production is 215.1 in 1992-93 (base year 1980-81) it means that the industrial production in that year was up by 2.15 times compared to 1980-81. But it does not, however, mean that the net increase in the index reflects an equivalent increase in industrial production in all sectors of the industry. Some sectors might have increased their production more than 2.15 times while other sectors may have increased their production only marginally. What are the uses of Index Numbers? Uses of index numbers 1. Establishes trends Index numbers when analyzed reveal a general trend of the phenomenon under study. For eg. Index numbers of unemployment of the country not only reflects the trends in the phenomenon but are useful in determining factors leading to unemployment. 2. Helps in policy making It is widely known that the dearness allowances paid to the employees is linked to the cost of living index, generally the consumer price index. From time to time it is the cost of living index, which forms the basis of many a wages agreement between the employees union and the employer. Thus index numbers guide policy making. 3. Determines purchasing power of the rupee Usually index numbers are used to determine the purchasing power of the rupee. Suppose the consumers price index for urban non-manual employees increased from 100 in 1984 to 202 in 1992, the real purchasing power of the rupee can be

found out as follows: 100/202=0.495 It indicates that if rupee was worth 100 paise in 1984 its purchasing power is 49.5 paise in 1992. 4. Deflates time series data Index numbers play a vital role in adjusting the original data to reflect reality. For example, nominal income(income at current prices) can be transformed into real income(reflecting the actual purchasing power) by using income deflators. Similarly, assume that industrial production is represented in value terms as a product of volume of production and price. If the subsequent years industrial production were to be higher by 20% in value, the increase may not be as a result of increase in the volume of production as one would have it but because of increase in the price. The inflation which has caused the increase in the series can be eliminated by the usage of an appropriate price index and thus making the series real.
Q.1. b. What are the characteristics of a good measure of central tendency? The characteristics of a good measure of central tendency are: Present mass data in a concise form: The mass data is condensed to make the datareadable and to use it for further analysis. Facilitate comparison: It is difficult to compare two different sets of mass data. Butwe can compare those two after computing the averages of individual data sets.While comparing, the same measure of average should be used. It leads to incorrectconclusions when the mean salary of employees is compared with the median salaryof the employees. Establish relationship between data sets: The average can be used to drawinferences about the unknown relationships between the data sets. Computing theaverages of the data sets is helpful for estimating the average of population. Provide basis for decision-making: In many fields, such as business, finance,insurance and other sectors, managers compute the averages and draw usefulinferences or conclusions for taking effective decisions. The following are the requisites of a measure of central tendency: 1.It should be simple to calculate and easy to understand 2.It should be based on all values 3.It should not be affected by extreme values 4.It should not be affected by sampling fluctuation 5.It should be rigidly defined 6.It should be capable of further algebraic treatment