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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers3 Marks
Question
What is base year? What factors are considered in its selection?
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Answer

The following are the basic criteria for the choice of the base period:
  1. The base period must be a normal period i.e. a period frees from all sorts of abnormalities or random fluctuations such as labor strikes, wars, floods, earthquakes etc.
  2. The base period should not be too distant from the given period. Since index numbers are essential tools in business planning and economic policies the base period should not be too far from the current period. For example for deciding increase in dearness allowance at present there is no advantage in taking 1950 or 1960 as the base, the comparison should be with the preceding year after which the DA has not been increased.
  3. Fixed base or chain base. While selecting the base a decision has to be made as to whether the base shall remain fixing or not i.e. whether we have fixed base or chain base. In the fixed base method the year to which the other years are compared is constant. On the other hand, in chain base method the prices of a year are linked with those of the preceding year. The chain base method gives a better picture than what is obtained by the fixed base method.

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