What kind of Relationship found between Index Numbers and Value of Money Economy?

What is Index number?

Index numbers are used to check the changes in the general price level. As we know the value of money changes very frequently over time. The value of money is related to the changes in the price level. When a price level increases the value of money decrease and if the price level decreases the value of money increase. If the value of money changed, it is reflected by the general price level. To check the changes in the general price level, we use the statistics device, which is called index numbers. 

What is the Value of Money?

The Value of Money is the number of goods and items, or you can say it’s the power of purchasing. How many good and services you can purchase with the help of money. How many products can we buy it depends on the level of the price? When the level of price increases, then we can buy fewer goods, and if the level of prices decreases, then we can purchase more products.

What are the types of Index Numbers?

Index numbers are divided into five types which are given below. Have a look.

  • A retail prices index number
  • The wholesale prices index number
  • Working-class cost of living index number
  • The general purpose index number
  • Consumptions goods index number

What are the Features of Index numbers?

Index numbers are different types of average. Mean, and mode is used to check the absolute changes and compare only those series that are available in the same units. Now the index numbers method is utilized to check the related changes in the level of occurrence where we won’t be able to check the absolute difference and series are available in different types of items.

  • Index numbers are used to check the changes in those factors which cannot measure directly.
  • The method of index numbers is used to check the changes in one variable or one related group of a variable.
  • The index numbers’ method is also used to check and compare the level of experience on a specific date with its level of the previous period.

What are the uses of Index numbers?

Index numbers have much practical importance in measuring changes in the cost of Living, production trends, trade, income variations, etc.

In Measuring Changes in the Value of Money

Index numbers are used to check the changes in the value of money. The ups and downs of the value of money are required to check the direction of production and employment to make a secure payment in the future. It also helps to know the details of the income of different people of groups at different places and times.

In cost of Living

The cost of living index numbers is used to check the ups and downs of the income of workers. It works on the money which is giving to the workers as other allowances.

In analyzing markets for Goods and Services

It is used to analyze the markets for certain kinds of goods and services like food, clothing, fuel, and lighting, house rent, etc.

In measuring changes in Industrial Production

Industrial index numbers can check the changes in the quantity of production. It also checks the increment or decrement of the industrial output in a given year as compared to the base year.

In Internal Trade

The study of indices of the wholesale prices of the consumer can be helpful to increase the decrease in the internal trade of the commerce and industry.

What are the Limitations of Index Numbers?

Index numbers face many limitations, and some of them are listed below.


Index numbers are only good at Approximations. It can’t be considered as infallible guides. The data of index numbers are open to question, and it leads to different interpretations.

International Comparisons Difficult

International comparison is difficult for index numbers. It faces many difficulties to do that.

Comparisons between Different Times Difficult

It’s not easy to establish comparisons between different periods. After some time, few popular commodities are replaced by others.

Measure Sectional price levels only.

Index numbers help to check the changes in the regional price level. Index numbers may prepare for some specific purpose which cannot be beneficial for another.

What are the Advantages of Index Numbers?

Index numbers are used to measure all types of quantitative changes in different fields. Various advantages of index numbers are given below.

General Importance

  • They can check the changes in one variable or one group of the variable.
  • Index numbers are beneficial to check the comparisons between different places or different periods.
  • They can easily solve complex facts.
  • They can predict the future as well.
  • Index numbers are also useful in academic and practical research.

Measurement of Value of Money

Index numbers are beneficial to check the changes in the value of money or price of level from time to time. Changes in the price level are needed to check the production and employment of the country.

Changes in production

It also provides information about production trends in different industries of the economy. They are beneficial to check the actual condition of different companies.

Formation of economy policy

Index numbers are also beneficial to the government to formulating and evaluating economic policies. It can check the changes in economic conditions and help the planner to make economic policies accordingly. 

Useful in all Fields

Index numbers are useful in almost every field, but it’s very useful in the economy.


So, index numbers are used to check all types of quantities changes in all kinds of industries. It is used in all sorts of fields. These changes also help the government to get the monetary and fiscal measures to get the growth with stability.


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