Main advantages or uses of index number can be highlighted as follows:
1. Measurement Of Relative Changes
Index number helps to measure the quantitative changes in variables by comparing the data of current year with the data of base year.
2. Measurement Of Price Level Change
Under this method, the price of current period can be compared with the price of past period. It helps to know the changes in price level and value of money.
3. Measurement Of Inflation Rate
Index number helps to know the inflation rate by measuring price level and value of money between two periods.
It helps to measure standard of living by comparing cost of living and price level. So, the living standard of people can be known.
5. Wage Policy Formulation
Index number helps to determine wages and allowance of employees. Adjustment in wages and salaries are made according to the cost of living.
6. Useful In Decision Making
Index number is very useful in planning and decision making process of the business firm.
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7. Useful In Foreign Trade
It is used to compare imports and exports of two different periods. So, it provides key information about the volume of foreign trade.
