Index Number

Index Number

Index Number, a number showing by its variations the changes over time or space of a quantity that cannot itself be observed or measured directly. Examples are business activity, the physical volume of production, the general level of wholesale prices. The term index number may be applied to any standardized series of comparative values, usually called 'relatives', and the index is an avenge of a number of 'relatives'.

The important features in constructing an index number are its coverage, base period, weighting system and method of averaging the observations. The coverage denotes the scope of the information (prices, output, etc.) collected from members of a sample survey and the size of the sample. The base period is that in which data used as the base of the index number were collected, frequently a year, but it may be as short as one day or as long as the average of a group of years. The length of the base period depends on the nature of the information being used, the purpose for which the index number is being compiled, and the need to remove abnormal influences or 'bias'. The components of an index number are frequently 'weighted' according to their relative importance: for example, in index numbers of prices the items may be weighted by the quantity of each item consumed; thus bread may have twice or three times the weight of biscuits. If spending habits change the base period is replaced by a more recent one so that the index number of prices reflects up-to-date expenditures. .


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