Index numbers can be defined as the markers which quantify the ratio of changes in a variable, or collection of variables over predetermined time. An index number is a single ratio that measures the consolidated change of a few factors between two distinct circumstances, places or time (Belloc, Hilaire). Index numbers have turned out to be one of the most broadly utilized tools for judging the beat of the economy today. Despite the fact that they were initially built to gauge the impact of changes in prices, they are being utilized by many people to monitor the pulse of the economy. Index numbers are depicted as indicators of economic activity because whenever someone needs to have a clue of what is going on in an economy, he or she should look at the essential devices like the index numbers of businesses, agricultural production, industrial production and so on. Index numbers are vital instruments of financial and business analysis. Their importance can be valued as discussed below.
First and foremost, index numbers are utilized in the quantification of changes in the value of money. An investigation on the increase or fall in the value of money is fundamental in the determination of employment and production to aid in future payments and to appreciate adjustments in the income of various groups of individuals at different places and at different times. Afriat, S. N, and Carlo Milana pointed out that by utilization of an exclusive tool of index number, it is conceivable to quantify changes in various parts of the value of money with every specific viewpoint being significant to another purpose.
Secondly, index numbers are used to shed light on the cost of living among the people. Index numbers have been used to shed light on the rise or fall in the income of the workers as compared to the current cost of living. Analyzing the cost of living index helps the government and many employers in the determination of wages and other allowances that are given to the workers. In many organizations, the cost of living index is also significant in the negotiation of salaries and wage contracts.
Industrial production index numbers are useful in the measurement of increase or decline in industrial production within a particular time frame (Afriat, S. N, and Carlo Milana). Production in one year can be compared to production in the base year. The industrial production index number tells us the present condition of specific industries, and we can acknowledge if the industrial output is growing or diminishing as Industrial index number measures the quantity of production in the industry.
Consumer price index numbers are significant to market analysis. These index numbers help in the market analysis for particular type of goods and services. The importance attached to various products like food, garments, lighting, and fuel helps regulate the market for such goods and services. In simple words, index numbers are significant when comparing usage of a consumer product with the population base, to better comprehend the proportion or connection between the people and the consumption of a particular service or product.
Index numbers are significant to the government as they play a big part in formulation and adoption of appropriate economic policies. Index numbers measure changes in the magnitude of things like prices, salaries, compensation, items, trades, imports, production and so on (Belloc, Hilaire). By analyzing the index numbers of these quantities for various periods of time, the government can get to acknowledge the present pattern of economic activities and employ various economic policies.
An index number encourages comparison of international economic factors. For example, when someone needs to make comparisons in living standards between different nations, they will have to utilize the index number. A real per capita incomes of the nations in comparison are constructed on the basis of index numbers of prices. Index numbers enable economists to measure development levels of different nations.
In the modern markets, business men have employed the use of index numbers to help them predict the market prices. Index numbers may indicate a rise in prices that will leave business people full of optimism, and they will react by investing more to gain more profits.When the index numbers indicate a fall in prices, business people will become cautious and will stop investing much more.
In conclusion, index numbers are significant when studying economic and commercial activities and measurement of relative change in price level. As discussed above, people in business, economists, governments, industries, and firms use index numbers in their day to day activities. This has helped in guidance and formulation of economic policies necessary for human comfort and business survival. According to Afriat, S. N, and Carlo Milana, even though index numbers are significant in day to day economic activities, they have created some theoretical and practical problems. These never precisely represent the adjustments in the relative level of a marvel and that statisticians can easily misuse them. Since these issues cant be solved accurately, the method of index loses its utility.
Afriat, S. N, and Carlo Milana. Economics And The Price Index. London, Routledge, 2009.
Belloc, Hilaire. On. Freeport, N.Y., Books For Libraries Press, 2007.
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