Importance (Uses) of Price Indices
- They are used to compare the cost of living between countries at a particular time and for one country overtime. For example comparing the cost of living between Uganda and Kenya or the cost of living for Uganda
- They are used to measure the changes in the value of money. That is determining the rate of inflation in the economy overtime.
- They are used in wage determination. This is because wages need to be adjusted according to changes in the value of money.
- They are used in tax determination. This is because taxes need to be adjusted according to the price changes
- They are used to determine the terms of trade for the country. Terms of trade refer to the ratio of the price index of exports to the price index of imports.
- Price indices are used by the government to decide whether to give any form of subsidies to the producers. This is done to encourage production by reducing the cost of production in case there is an increase in the prices of factor inputs.
- They are used to adjust nominal GNP to real GNP using the GNP deflator
- Price indices are used to measure the rate of economic growth of the country over time. This is achieved by computing the GNP/GDP indices
- They are used to forecast and predict the trends in business activities overtime based on time series data
CATEGORIES Economics
TAGS Dr. Bbosa Science
