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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers6 Marks
Question
State any four difficulties in constructing index numbers.
✓

Answer

The problems/ difficulties faced while constructing an index number are:
  1. Purpose of the index: Calculation of a volume index will be appropriate when one needs a value index. The selection of items, their prices etc. depend on the purpose of index numbers which should be clear.
  2. Selection of the items: The total number of items selected for the index should be neither too small nor too large. Items should be relevant to the purpose of the index. The items should be standardised and representative of the whole group for which index number is to be constructed.
  3. Price quotation: We know that price of many commodities vary from place to place and even from shop to shop in the same market. A selection must also be made as to whether the wholesale price or retail price are required. The choice would depend upon the purpose of index number.
  4. Selection of base year: Base year is the reference year from which comparisons are made. The base year should be a normal year. It should be free from abnormalities like wars, earthquakes etc. Moreover, it should not be from distant past. It should be a year of recent past. It should neither be too far nor too near.
  5. Selection of weights: In fact, all commodities included do not have equal importance. Therefore, to have accurate results, commodities are assigned weights according to their importance. There are two ways of assigning weights, i.e., quantity weights and value weights.
  6. Choice of an average: Mostly choice is to be made between arithmetic mean and geometric mean. Though geometric mean is considered best in theory as this is the most suitable average for measuring relative changes, yet arithmetic mean is more popularly used while constructing index numbers.
  7. Choice of an appropriate formula: Various formulae can be used in the construction of index numbers but it is very essential to select the most suitable out of them. The selection of the formulae depends upon the purpose of index number and availability of data.

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