Index Numbers

Index numbers are statistical tools used to measure relative changes in a group of variables over time. They are essential for economic analysis, particularly for tracking inflation, production levels, and other economic trends. Key types include Price Index Numbers (like the Consumer Price Index - CPI), which measure changes in prices; Quantity Index Numbers, which measure changes in physical volume; and Value Index Numbers, which measure changes in the total value (Price x Quantity). The construction of an index number involves selecting a base year, choosing a representative 'basket' of items, assigning weights to these items based on their importance, and selecting an appropriate formula (e.g., Laspeyres', Paasche's, or Fisher's). While powerful, index numbers have limitations, as they are only averages and may not perfectly reflect changes in quality or consumption patterns.