Index Number in Economics

Index numbers — chiefly the WPI, CPI and IIP — are indispensable in policy making:

• CPI / cost-of-living index guides wage negotiation, income and price policy, rent control, taxation and general economic policy.
• WPI is used to strip the effect of price change out of aggregates such as national income and capital formation, and above all to measure the rate of inflation. Inflation is a general and continuing rise in prices; if large enough, money can lose its role as a medium of exchange and unit of account, its chief effect being to lower the value of money. The weekly inflation rate is

where $X_t$ and $X_{t-1}$ are the WPI for the $t$th and $(t-1)$th weeks.

• CPI also gives the purchasing power of money and the real wage:

For example, if CPI (1982 = 100) is 526 in January 2005, a rupee is worth $\frac{100}{526} = 0.19$ — about 19 paise of 1982 money. A money wage of Rs 10,000 has a real wage of $10{,}000\times\frac{100}{526} = \text{Rs }1{,}901$, i.e. the purchasing power of Rs 1,901 in 1982. Someone earning Rs 3,000 in 1982 is now worse off; to hold the 1982 standard, the salary should rise to $3{,}000\times\frac{526}{100} = \text{Rs }15{,}780$. …