Question

Describe the use of index number for deflating time series data?

Answer 1

Index numbers are intended to measure the degree of economic changes over time. These numbers are values stated as a percentage of a single base figure. Index numbers are important in economic statistics. In simple terms, an index (or index number) is a number displaying the level of a variable relative to its level (set equal to 100) in a given base period.




  

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Index Numbers

Index numbers are intended to measure the degree of economic changes over time. These numbers are values stated as a percentage of a single base figure. Index numbers are important in economic statistics. In simple terms, an index (or index number) is a number displaying the level of a variable relative to its level (set equal to 100) in a given base period.

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Index numbers are intended to study the change in the effects of such factors which cannot be measured directly. Bowley stated that "Index numbers are used to gauge the changes in some quantity which we cannot observe directly". It can be explained through example in which changes in business activity in a nation are not capable of direct measurement but it is possible to study relative changes in business activity by studying the variations in the values of some such factors which affect business activity, and which are proficient of direct measurement.

Index numbers are usually applied in statistical device to measure the combined fluctuations in a group related variables. If statistician or researcher wants to compare the price level of consumer items today with that predominant ten years ago, they are not interested in comparing the prices of only one item, but in comparing some sort of average price levels (Srivastava, 1989). With the support of index numbers, the average price of several articles in one year may be compared with the average price of the same quantity of the same articles in a number of different years. There are several sources of 'official' statistics that contain index numbers for quantities such as food prices, clothing prices, housing, and wages.

Index numbers may be categorized in terms of the variables that they are planned to measure. In business, different groups of variables in the measurement of which index number techniques are normally used are price, quantity, value, and business activity.

Types of Index Numbers

Simple Index Number: A simple index number is a number that measures a relative change in a single variable with respect to a base. These type of Index numbers are constructed from a single item only.
Composite Index Number: A composite index number is a number that measures an average relative changes in a group of relative variables with respect to a base. A composite index number is built from changes in a number of different items.
Price index Numbers: Price index numbers measure the relative changes in prices of a commodity between two periods. Prices can be either retail or wholesale. Price index number are useful to comprehend and interpret varying economic and business conditions over time.
Quantity Index Numbers: These types of index numbers are considered to measure changes in the physical quantity of goods produced, consumed or sold of an item or a group of items.