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Significance of Index Numbers in Economics

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Significance of Index Numbers in Economics : 

1) Framing suitable policies :
Index numbers provide guidelines to policy makers in framing suitable economic policies such as agricultural policy, industrial policy, fixation of wages and dearness allowances in accordance with the cost of living etc.
2) Studies trends and tendencies :
Index numbers are widely used to measure changes in economic variables such as production, prices, exports, imports etc. over a period of time. For example, by examining the index of industrial production for the last five years, we can draw important conclusions about the trend of industrial production whether it shows an upward tendency or a downward tendency. 
3) Forecasting about future economic activity :
Index numbers are useful for making predictions for the future based on the analysis of the past and present trends in the economic activities. For example, based on the available data pertaining to imports and exports, future predictions can 
be made. Thus, forecasting guides in proper decision making.
4) Measurement of inflation :
Index numbers are also used to measure changes in the price level from time to time. It enables the government to undertake appropriate anti-inflationary measures. There is a legal provision to pay the D.A. (dearness allowance) to the employees in organised sector on the basis of changes in Dearness Index.
5) Useful to present financial data in real terms :
Deflating means to make adjustments in the original data. Index numbers are used to adjust price changes, wage changes etc. Thus, deflating helps to present financial data in real terms (at constant prices).

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