Which statement correctly defines an index number?

• A. It measures changes in price or output over time relative to a base period
• B. It measures the absolute price in a given year
• C. It is always a monetary value
• D. It is unaffected by base period selection

Answer: (A)

An index number is a relative measure that shows how a variable changes over time by comparing each period to a reference base period. It’s usually computed by dividing the current value by the value in the base period and multiplying by 100, so you see percentage changes rather than raw figures. This makes it ideal for tracking movements in prices (like a price index) or in output (like an production index).

Because it’s a relative, normalized figure, it isn’t itself an absolute price or a monetary value. And the base period matters: changing the base changes the numeric index values, even though the actual rates of change can be seen when comparing periods. So the statement that it measures changes in price or output over time relative to a base period is the best fit.