Explain the types of Index Number.

Answer: Index numbers are mainly of three types.

1. Price index number: It measures changes in the prices of goods over time, e.g. wholesale price index (WPI) and consumer price index (CPI). It helps to measure inflation and changes in the value of money. \(P_{01} = \dfrac{\sum p_1}{\sum p_0}\times 100\).
2. Quantity index number: It measures changes in the physical volume of goods produced, sold or consumed, e.g. the index of industrial production (IIP) or agricultural production. \(Q_{01} = \dfrac{\sum q_1}{\sum q_0}\times 100\).
3. Value index number: It measures changes in the total value (price multiplied by quantity) of goods, e.g. value of exports or retail sales. \(V_{01} = \dfrac{\sum p_1q_1}{\sum p_0q_0}\times 100\).

Index numbers can also be simple (all items given equal importance) or weighted (items given weights by importance), and special-purpose indices such as the Sensex or cost of living index are also constructed.