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SAI INTERNATIONAL SCHOOL

Statistics for Economics

Class-XI

MODULE-67

Statistics for Economics -Index Numbers

Index Number
An index number is a statistical device for measuring changes in the magnitude of a
group of related variables. It represents the general trend of diverging ratios from which
it is calculated.
According to Croxton and Cowden, “Index numbers are devices for measuring
difference in the magnitude of a group of related variables.”

Steps or Problems in the Construction of Price Index Numbers:

The construction of the price index numbers involves the
following steps or problems:
1. Selection of Base Year:
The first step or the problem in preparing the index numbers is the

selection of the base year. The base year is defined as that year with
reference to which the price changes in other years are compared and
expressed as percentages. The base year should be a normal year.
In other words, it should be free from abnormal conditions like wars,

famines, floods, political instability, etc. Base year can be selected in
two ways- (a) through fixed base method in which the base year
remains fixed; and (b) through chain base method in which the base
year goes on changing, e.g., for 1980 the base year will be 1979, for

1979 it will be 1978, and so on.

2. Selection of Commodities:
The second problem in the construction of index numbers is the

selection of the commodities. Since all commodities cannot be
included, only representative commodities should be selected keeping
in view the purpose and type of the index number.