Meaning and Definition of Index Numbers

Everyday economic reporting — "the cost of living rose by 6% this year," "industrial output grew 4.2%," "share prices fell 300 points" — is describing change in a group of DIFFERENT items (dozens of consumer goods, dozens of industries, dozens of listed companies) using a SINGLE summary number. That summary number is an index number: a statistical measure that expresses the average relative change in a group of related variables over two different situations, usually time periods, one of which is fixed as the base period.

An index number is always expressed as a percentage relative to the base period, which is itself always taken as 100. If the current-year price index of a group of goods works out to 128, the plain economic meaning is that prices have, on average, risen by 28% over the base year — not that any single commodity rose by exactly 28%, since an index summarises the NET movement of many items that may individually have risen, fallen, or stayed flat by different amounts.

This chapter, in the Maharashtra HSC (MSBSHSE) Std XII Economics syllabus, studies price index numbers in depth — how they are constructed, the different formulae used, the special case of the Consumer Price Index (Cost of Living Index), and the genuine practical difficulties involved. Index numbers are one of the most heavily used numerical tools in applied economics: wage revisions, pension indexation, GDP deflation, and monetary policy decisions all rely on an index number of one kind or another.

Formal definition (Spiegel): "An index number is a statistical measure, designed to show changes in a variable or a group of related variables with respect to time, geographic location or other characteristics." The MSBSHSE Class 12 Economics syllabus keeps this general idea but focuses the numerical work specifically on PRICE index numbers — a Maharashtra Board economics student is expected to both explain what an index number means and actually construct one from raw price-quantity data.