Quantitative Aptitude · Index Numbers

Meaning and Uses of Index Numbers for CA Foundation

Updated 1 October 2026 · Fact-checked

An index number is a statistical measure that shows the relative change in a variable, such as price, quantity or value, over time or place, compared with a base period set at 100. To solve questions, identify the type, find base and current values, and read the percentage change.

Understand Meaning and Uses of Index Numbers

An index number is a single figure that tells you how much a group of related items has changed compared with a fixed reference point. The reference point is called the base period. The index of the base period is usually taken as 100. The period you are studying is the current period.

Suppose the price index of a basket of goods is 125 this year with the base year at 100. This means prices are, on average, 25% higher than in the base year. If the index is 90, prices are 10% lower. You do not need to track each item. One number summarises the whole group.

Index numbers are often called economic barometers because they show the general state of the economy, like a barometer shows pressure. They are also described as averages with a difference. Like an average, they summarise many items. Unlike a simple average, they compare the same group across time or place and often use different weights for items.

The main types are:

Price index: measures the change in the price level of goods or services. The Consumer Price Index and the Wholesale Price Index are examples.
Quantity index: measures the change in physical volume, such as the Index of Industrial Production.
Value index: measures the change in total value, which is price × quantity, such as total sales or total imports.

Key characteristics: index numbers are expressed as percentages (the % sign is usually dropped), they are specialised averages, they measure changes that cannot be measured directly, and they allow comparison over time or between places. Uses include measuring the cost of living, adjusting wages and dearness allowance, studying trends, deflating money values to real values, and helping government and business make policy and planning decisions.

Key formulas to remember

Basic idea of a simple index: Index number = (Current period value ÷ Base period value) × 100; Works for a single item. The base period always equals 100.
Percentage change from the index: Percentage change = Index number − 100; Valid when the base index is 100. A result of +25 means a 25% rise; −10 means a 10% fall.
Value index: Value index = (Σp₁q₁ ÷ Σp₀q₀) × 100; p₀, q₀ are base period price and quantity; p₁, q₁ are current period price and quantity.
Relation among price, quantity and value: Value = Price × Quantity; Value index is built from both price and quantity changes, so it is not a pure price or quantity index.
Real value by deflating: Real value = (Money value ÷ Price index) × 100; Used to remove the effect of price changes, for example real wages.

How to solve Meaning and Uses of Index Numbers questions

Most questions on meaning and uses are either conceptual (which type, which use, which statement is true) or simple numerical readings of an index. Use this method.

1Read the question and decide whether it asks for a definition, a type, a use or a calculation.
2If it is conceptual, identify what is measured: price, physical quantity, or price × quantity. That gives the type.
3Note the base period and confirm its index is 100.
4For a numerical reading, compute the index using (current ÷ base) × 100, or take index − 100 for percentage change.
5For real values, divide the money value by the price index and multiply by 100.
6Check each option against the definition. Remove options with absolute claims such as 'always' or 'exactly' unless they are textbook facts.
7Pick the option that matches, and check the direction (rise or fall) and units.

Quickest way: Type-spotting and percent-reading shortcut

When to use it: Use for MCQs that ask you to name the type of index, a use, or the percentage change from an index figure.

Look at the key word: prices means price index, output or volume means quantity index, sales or turnover means value index.
For percentage change, subtract 100 from the index mentally. 112 means 12% up, 95 means 5% down.
For the change between two indices, use (new − old) ÷ old × 100, not new − old.
For deflating, divide by the index and multiply by 100. Estimate first: an index of 125 reduces money value by one fifth.
If two options look close, test them against the base-equals-100 rule. Skip long calculations if time is short, since a wrong answer costs 0.25.

Common mistakes in Meaning and Uses of Index Numbers

Treating an index of 120 as a 120% increase.
Students forget that the base is 100, not 0.
Fix: Always subtract 100. An index of 120 means a 20% rise over the base.
Calling a total sales index a price index.
Both involve money, so the types blur.
Fix: Ask what is measured. Price × quantity is value. Only prices alone make a price index.
Finding percentage change between two index numbers by simple subtraction.
Students carry over the base-100 habit to non-base periods.
Fix: If the index moves from 125 to 150, the rise is (150 − 125) ÷ 125 × 100 = 20%, not 25%.
Assuming an index number measures change exactly and for every individual item.
The single figure looks precise.
Fix: Remember it is a general, average measure based on a sample of items, so it shows overall direction, not each item's change.
Forgetting to divide by the price index when finding real income.
Students compare money values directly.
Fix: Real value = money value ÷ price index × 100. Higher prices reduce real value.

Worked examples

Example 1

The price index of a commodity group is 140 with the base year 2015 = 100. Which statement is correct? (a) Prices have risen by 140% (b) Prices have risen by 40% (c) Prices have fallen by 40% (d) Prices are 1.4% above base

Show the solution

The base index is 100.
The current index is 140.
Percentage change = 140 − 100 = 40.
The sign is positive, so prices rose.
Option (a) confuses index with change, (c) has the wrong direction, (d) has the wrong scale.

Answer: (b) Prices have risen by 40%

Example 2

A factory's money wage is ₹30,000 per month and the consumer price index is 125 (base = 100). What is the real wage? (a) ₹24,000 (b) ₹37,500 (c) ₹30,000 (d) ₹25,000

Show the solution

Real wage = (money wage ÷ price index) × 100.
= (30,000 ÷ 125) × 100.
30,000 ÷ 125 = 240.
240 × 100 = 24,000.

Answer: (a) ₹24,000

Example 3

Which index measures the change in total money worth of goods, given by price × quantity? (a) Price index (b) Quantity index (c) Value index (d) Cost of living index

Show the solution

Price index only tracks prices.
Quantity index only tracks physical volume.
Value = price × quantity, so the index of total worth is a value index.
Cost of living index is a special price index for consumers, so it is not the answer.

Answer: (c) Value index

Exam tips

Expect direct theory MCQs: definition, 'barometer', types and uses. Learn the one-line meaning of each type.
Practise reading percentage change from an index. It is a quick, safe mark.
Be careful with options using 'always' or 'exactly'. Index numbers are approximate, general measures.
Link this topic to deflating and cost of living index, which carry the numerical questions.
If you cannot decide between two options, skip. Negative marking is 0.25 per wrong answer.

Practice questions from Index Numbers

Meaning and Uses of Index Numbers: frequently asked questions

What is an index number in simple words?

It is a figure that shows how much a variable such as price or output has changed compared with a base period. The base period is set at 100. An index of 110 means a 10% rise.

What are the types of index numbers?

The three main types are price index, quantity index and value index. Price index tracks prices, quantity index tracks physical volume, and value index tracks price × quantity together.

Why are index numbers called economic barometers?

They show the general level and direction of economic activity, such as prices or production, the way a barometer shows pressure. They help in spotting trends and planning policy.

What are the main uses of index numbers?

They measure changes in cost of living, adjust wages and dearness allowance, help compare periods or places, and deflate money values into real values. Governments and businesses use them for planning.