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. The uses of index numbers are huge depend upon the usage.

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.

Index numbers possess much practical importance in measuring changes in the cost of living .production trends ,trade, income variation etc.

USES OF INDEX NUMBERS.

1. In measuring changes in the value of money: index numbers are used to measure changes in the value of money. A study in the rise or fall in the value of money is essential for determining the direction of production and employment to facilitate future payment and to know changes in the real income of different groups of people at different places.
2. In cost of living: cost of living index number in all case of different groups of workers through light on the rise or fall in the real income of workers. It is on the basis of the study of the cost of living index that money wage are determined and dearness and other allowances are granted to workers .the cost of index is also the basis of wage negotiations and wage contracts.
3. In analyzing markets for goods and services: Consumer price index numbers are used in analyzing markets for particular kinds of goods and services. The weight assigned to different commodities like food, clothing, fuel and lighting, house rent, etc. govern the market for such goods and services.
4. In measuring changes in industrial production: index numbers of industrial production measure increase or decrease in industrial production in a given year as compared to the base year. we can know from such as the actual condition of different industries. Whether the production is increasing or decreasing.
5. In internal trade: The studies of index of the wholesale price of consumer and industrial goods and of industrial production help commerce and industry in expanding or decreasing internal trade.
6. In external trade: the foreign trade position of a country can be accessed on the basis of it exports and import indicator. This index reveals whether the external trade of the country is increasing or decreasing.
7. In economic policies: Index numbers are helpful to the state in formulating and adopting appropriate economic policies. It measures changes in such magnitude as prices, income, wages, production employment, production exports and imports etc.
8. In determining the foreign exchange rate: index numbers of wholesale price of two countries are used to determine their rate of foreign exchange. They are the basis of the purchasing power which determines the exchange rate between two countries on inconvertible paper standard.

also read: explain the difficulties in the construction of index numbers.