Measurement of changes in value of money

 The value of money does not remain constant over time. It rises or falls and is inversely related to the changes in the price level. Changes in the general level of prices can be measured by a statistical device known as INDEX NUMBER.

MEANING

Index number is a technique of measuring changes in a variable or group of variables with respect to time, geographical location or other characteristics. In this context we are concerned only with Price index number, which measures changes in general price level (or the value of money) over a period of time.

Price index number indicates the average of changes in the prices of representative commodities at one time in comparison with that at some other time taken as the base period.

According to L.V. LESTER," An index number of prices is a figure showing the height of average prices at one time relative to their height at some other time which is taken as the base period."

TYPES OF INDEX NUMBER

Index number are of six types. They are:-

(1) WHOLESALE PRICE INDEX NUMBER:- These are constructed on the basis of the wholesale price of certain important commodities. These are generally used to measure the changes in value of money.

(2) RETAIL PRICE INDEX NUMBER:- These are constructed to measure the changes in the value of money on the basis of the retail price of final consumption goods. The retail price represent larger and more frequent fluctuations as compared to the wholesale prices.

(3) COST OF LIVING INDEX NUMBER:- These are constructed with reference to the important goods and services which are consumed by common people. These index number are used to measure changes in the cost of living of the general public.

(4) WORKING CLASS COST OF LIVING INDEX NUMBER:- This aims at measuring changes in the cost of living of workers. The prices of the goods and the index number are of great importance to the workers because their wages are adjusted according to these indices.

(5) WAGE INDEX NUMBER:- The purpose of these index number is to measure time to time changes in money wages. These, when compared with the working class cost of living index number, provide information regarding the changes in the real wages of the workers.

(6) INDUSTRIAL INDEX NUMBER:- These are constructed with an objective of measuring changes in the industrial production. The production data of various industries are included in preparing these index number.

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