Why do we need an index number?
We need an index number because it is a statistical device for measuring changes in the magnitude of a group of related variables. In real market situations involving a large number of commodities, percentage changes differ for every item. Reporting these changes individually would be confusing, so an index number provides a single numerical measure to represent the average change.
It enables the comparison of variables such as prices, volume of production, and cost of living over two different situations. Furthermore, index numbers are indispensable in economic policy making as they help in analysing the general trend of diverging ratios and assessing the basic health of the economy.
Explanation
The answer is derived from the 'Recap' and 'Conclusion' sections of the text, which highlight that index numbers measure relative changes in large datasets. The 'Construction of an Index Number' section illustrates the necessity by explaining that when percentage changes vary across items, a single measure is needed to avoid confusion. The text also explicitly states their importance in policy making.