Introduction:

Index number measures and compare economic variables it indicates percentage or ratio of changes in variables between two different period of time it measure relative changes in price quantity, value from one period of time to another period of time. It calculate the ratio of the current year value with the ratio of the base year value. The year with which the current year is compared is called base year. Construction of index numbers are depends on certain methods.

Index number is a specialized average designed to measure the changes in a variable with respect to time this statistical device is used to measure the changes in the quantities such as prices, wages, cost, sales production, exports imports etc. It measures a change over a period of time referring to a base year whose value is equal to 100. So it compare economic variables of a particular group at two different periods.

CONSTRUCTION OF INDEX NUMBERS.

1. Purpose of the index number: before construction of index number it should be decided the purpose of for which it is needed because index number constructed for one category purpose cannot be used for others.
2. Selection of commodities: commodities to be selected depend upon the purpose for which it is needed because index number constructed for one category purpose cannot be used for other.
3. Selection of prices: the next step is the select the prices of the commodities for this purpose care should be taken to select prices from a representative persons places or journals or other sources. But they must reliable prices may be quoted in money terms that is 100 per quintal or in quantity terms.
4. Selection of an average: since index numbers are averages the problem is how to select an appropriate average that two important averages are the arithmetic mean and geometrical mean AM and GM.
5. Selection of weight: while constructing an index number important to be given to the various commodities which are more important in the consumption should be given higher weight age then other commodities. The weight age is determined with reference to the relative amount of income spent on commodities.
6. Quality Control and Revision: Periodically review and revise the index numbers to ensure they accurately reflect changes in the variables being measured. This may involve updating the basket of goods, adjusting weights, or refining the methodology used for calculation.
7. Publication and Dissemination: Publish the index numbers along with relevant metadata and documentation to make them available to users. This allows policymakers, researchers, and other stakeholders to use the index numbers for analysis and decision-making.

also read: explain the uses of index numbers.