Uses of index numbers:

1.    Adjusting Wages and prices:
- An index number of cost of living can guide us in the adjustment of wages to the chaning    prices.   
2.    Exchange Stability:
- Index number of wholesale price can guide the currency authority in stabilizing the exchange rates.

3.    Comparing the purchasing power of two currencies:
  - index number can be used to compare the purchasing power of two currencies and to fix the purchasing power of parity.

4.    Equitable Discharge of debt:
 - Index numbers can be used as a basis for an equitable discharge of contracts. i.e. borrowing and lending. When prices rise the creditor is a looser for the same amount returned to him has less purchasing power. It should be more just to ensure that the creditor is gets back the same purchasing power. If that is so, then amount of principal should be increased in proportion to the increase in prices. Similarly, when the prices fall the debtor should be given relief to pay less otherwise the burden of the debt will be increased in proportion to the fall in prices.

5.    Measuring changes in prices:-
-    The method index numbers is used fir measuring the changes in the price level. This is essential for maintaining price stability. Price stability is conductive to the maintenance of economic activities desired level.


Post a Comment