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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers6 Marks
Question
Index numbers are constructed with certain specific objectives. So, their use is limited. In the context of this statement, discuss any four limitations of index numbers.
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Answer

The limitations of index numbers are:
  1. Limited Applicability: Each and every index number is constructed for a specific purpose. If it is used for some other purpose, then it might give misleading results. So, index number has limited applicability.
  2. International Comparison is not possible: Due to difference in the unit of currency and also difference in the composition of production and consumption across different countries, index numbers fail to facilitate international comparison.
  3. Limited Coverage: Index numbers are generally based on sample items, as it is practically impossible to include all the commodities. If the selected items are not able to represent the entire universe, then index numbers will not present a clear picture.
  4. Difficulties in the Construction of Index Numbers: The construction of index numbers involves several problems such as selection of base year, selection of commodities, selection of average, selection of source of data, etc.

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