In statistics, an index number is a composite statistic that measures changes in a representative group of individual data points or a compound measure that aggregates multiple indicators). Indexes, also known as composite indicators, summarize and rank specific observations). Index numbers are used to quantify changes in an individual variable or a group of variables concerning geographical locations, time, and other features. They are expressed in percentage form and are most commonly used in the study of the economic status of a particular region.
Index numbers have various types, including quantity, price, value, and special purpose, and individuals use different formulae to compute them, such as the simple aggregative method and the simple average of price relatives method. Items in indexes are usually weighted equally, unless there are reasons against it, such as if two items reflect essentially the same aspect of a variable, they could have a weight of 0.5 each).
Constructing the items for index numbers involves four steps. First, items should be selected based on their content validity, unidimensionality, the degree of specificity in which a dimension is to be measured, and their amount of variance. Second, items should be empirically related to one another, which leads to the third step of designing index scores, which involves determining their score ranges and weights for the items. Finally, indexes should be validated, which involves testing whether they can predict indicators related to the measured variable not used in their construction).
Index numbers have various uses, including helping governments to formulate new policies and adjust existing ones, studying trends in variables like export-import, industrial and agricultural production, share prices, and more, forecasting economic and business activities, and facilitating comparative study.
