Index numbers are significant tools of economic analysis in the following ways:
(1) Help in formulating Policies : Index numbers help the government and business organisations in framing their suitable economic policies for agriculture and industrial sector, wage and dearness allowance policies, etc.
(2) Help in the study of Trends and Tendencies : Index numbers study the relative changes in the level of phenomenon of different periods of time, so they can be used to predict future events. The economists can study the general trends of changes in price levels, agricultural and industrial production, export, imports, etc.
(3) Economic Barometer : Just as barometer is used to measure atmospheric pressure, index numbers measure the level of economic and business behaviour. They are very important for an economist, businessman, planners, policy makers, etc.
(4) Helps in Measurement of Inflation : It helps the government to take measures against inflation by giving additional D.A. to the employees on the basis of Dearness Index.
(5) Help to adjust National Income : By comparing current year’s national product prices with the base year’s prices, the Domestic Product (GDP) produced. Hence, this shows changes in real national income.
(6) To present Financial Data in Real Income : Index numbers are used to adjust price change, wage change, etc. Thus deflating helps to present the financial data at constant prices.
(Note: Deflating means to make adjustments / in the original data)
(7) Helps in determining Depreciation Cost: The price index helps in determining the depreciation cost of durable goods. At the time of inflation, it is useful to know the ) original cost of the commodities.
