Q.Define an index number and state any four important uses of index numbers.

Give the standard definition, then list distinct practical uses.

Definition. An index number is a specialised average that measures the relative change in a single variable or a group of related variables between two situations — usually a base period (whose index is taken as $100$) and a current period. It is expressed as a percentage, but the $\%$ sign is not written; an index of $130$ means a $30\%$ increase over the base.

Four uses of index numbers.

1. Economic barometers. They summarise the general movement of prices, production and trade in a single figure, signalling whether business conditions are improving or worsening.
2. Measuring inflation and deflation. By tracking the general price level, index numbers show the rate of inflation (rising prices) or deflation (falling prices), which the government tries to control.
3. Fixing wages and dearness allowance. The cost of living index measures how the cost of a worker's basket has changed, and is the basis for revising wages and granting dearness allowance so that real income is protected; it also measures the purchasing power of money.
4. Framing economic policy. Governments rely on price, production and wage indices when deciding taxation, price control, subsidies and planning targets.

(Other acceptable uses: forecasting by producers, comparison of the standard of living of different groups, and deflating value series to real terms.)

Defining an index number as an ordinary average of prices rather than an average of changes expressed relative to a base of 100. Also, listing the same use twice in different words (e.g. 'measures price change' and 'shows inflation') instead of four genuinely distinct uses.