The index number was first constructed by an Indian Statistician, Carli in 1764. It was used for the first time to compare the prices of the year 1750 with that of the year 1500. An index number is a statistical tool for measuring changes in the magnitude of a group of related variables.
An index number is a statistical measure designed to show changes in a variable or a group of related variables with respect to time, geographical location or another characteristic.
Inflation is defined as a consistent and significant rise in prices in a country over a time period. It cannot be described as a slight increase in prices or an irregular increase in prices, but, as a situation characterized by a sustained increase in the general price level.
Features of Inflation and Index Numbers:
- The most popular price index for determining the country’s inflation rate is the Wholesale Price Index.
- It reveals the price movement of commodities in all trade and transactions.
- It is merely a generic index that comprehensively captures price variations.
- The Wholesale Price Index is available on weekly basis and the shortest time lag possible is 2 weeks.
Due to all of these characteristics, the Wholesale Price Index is the most often used inflation measure.
If a person’s money remains constant, his purchasing power decreases as a result of inflation. Accordingly, workers keep bothering the government for dearness allowance (DA) to compensate for the decline in purchasing power during the inflationary period. If the Wholesale Price Index increases by 100%, the value of money falls to 50%. The price level is doubled, and the rupee’s purchasing power is halved. A 10% increase in the price level means a 10% drop in the purchasing power of the people’s money if their income stays the same.
A fall in the rate of inflation does not imply a fall in the price level
The distinction between inflation and the pace of inflation should not be ignored. Inflation is measured as a percentage increase in the general price level, which goes from 100 in 2019 to 120 in 2020, or a 20% annual increase. While prices generally increase throughout the year, this may not be the case every week or even at the same rate. The weekly relative changes in the price index are measured by the rate of inflation.
A1 = Wholesale price index for week 1
A2 = Wholesale price index for week 2
As a result, the rate of inflation may increase or decrease over the year. It just signifies an increase or decrease in the pace of inflation or an increase or decrease in the speed of inflation, not a fall in the price level. In week 1, the rate of inflation may be 6% while in week 2, the rate of inflation maybe 5%. The decline from 6% to 5%, should not be taken as a fall in the price level. It just denotes a fall in the speed at which prices tend to rise.
If the Wholesale Price Index increases from 100 in 2011-2012(base year) to 200 in 2020, and if the price rise has essentially been constant over time (the general price level has been increasing by 5–10% every year), it would be termed as a situation of inflation. This implies continuous corrosion in the purchasing power of money.
Index Number of Agricultural Production
The weighted average of the number of relatives used is known as Index Number of Agricultural Production. It offers a quick indicator of how the agricultural sector is doing. The triennium that ended in 1981–1982 serves as its basis period. The agricultural production index score for the years 2003–2004 was 179.5. It indicates that compared to the three-year average (1979-80, 1980-81, 1981-82), agricultural production has increased by 79.5%.
Sensex shows changes in the Indian Stock Market. It is the Short form of the Bombay Stock Exchange Sensitive Index. It is the oldest index in India and serves as a useful guide to an investor. It is formed with the base or reference year of 1978-79, and the base value of the Sensex is 100 on April 1, 1979. It is the market capitalization-weighted index of 30 stocks, which represents a large sample of companies that are well-established and economically sound. The changes in these stocks are likely to affect the overall stock market. Thus it is widely employed to estimate the performance of the Indian stock markets. This shows an increase in the expected earnings from investments in the stock market.
Human Development Index
The UN created a composite index to evaluate the relative significance of various nations in the field of social and economic development. It is a composite index since many human development indicators were used in its composition. Life expectancy, adult literacy, access to better water resources, access to better sanitation, and GDP per country are only a few examples of the many indicators of human development available. The major goal is to classify nations according to their “human development” levels, which aims to identify whether a nation is developed, developing, or undeveloped.
Producer Price Index
It measures the average change in the selling prices for the producers of goods. The mean of all changes over a year is generally used to compute this index. It measures price variations from the standpoint of the producer. It focuses on the area of industry-based production and stage-based businesses.