Question

Explain the problems in Construction of Index numbers

Accepted Answer

Following are some of the problems involved in the construction of index numbers:

(1) Purpose of index numbers:

- Many different types of index numbers are constructed with different objectives.
- Example: Price index, quantity index, consumer price index, wholesale price index, and more
- So, the first important issue/problem is to define the objective for which the index number is to be constructed.

(2) Selection of base period:

- Base period is the period against which the comparisons are made.
- Selection of a suitable base period is a very crucial step.
- It should be of reasonable length and normal one, i.e., it should not be affected by any abnormalities like, natural calamities, war, extreme business cycle situations.
- It should neither be too close nor too far.

(3) Selection of commodities:

- All the items cannot be included in the construction of an index number.
- Nature and number of items to be included in an index number depends upon the type of index to be constructed.
- For example, to construct a 'consumer price index' those commodities should be considered that are generally consumed and the number should be neither too small nor too big.

(4) Selection of sources of data:

- Depending upon the type of index numbers, the correct source should be selected for data.
- Like, to construct $\mathrm{CPI}$, we need retail prices and to construct the wholesale price index, we need wholesale prices. Accordingly, the right and reliable source should be selected.

(5) Selection of weights

- The term 'weight' refers to the relative importance of different items in the construction of index numbers.
- All the items do not have the same importance.
- So, it is necessary to adopt some suitable measures to assign weight.

(6) Selection of an appropriate formula

- There are various formulas for construction of index numbers like Laspeyres' method, Paasche's method, Fisher's method, and more.
- No single formula is appropriate for all types of index numbers.
- The choice of formula depends upon the purpose of the available data.

Commodity	Price (in $₹$ )		Quantities
	$2000$	$2001$	$2000$	$2001$
$A$	$10$	$12$	$20$	$22$
$B$	$8$	$8$	$16$	$18$
$C$	$5$	$6$	$10$	$11$
$D$	$4$	$4$	$7$	$8$

Commodity	Price (in $₹$ )		Quantities
	$2000$	$2001$	$2000$	$2001$
$A$	$10$	$12$	$20$	$22$
$B$	$8$	$8$	$16$	$18$
$C$	$5$	$6$	$10$	$11$
$D$	$4$	$4$	$7$	$8$

Commodity	Price (in $₹$ )		Quantities
	$2000$	$2001$	$2000$	$2001$
$A$	$10$	$12$	$20$	$22$
$B$	$8$	$8$	$16$	$18$
$C$	$5$	$6$	$10$	$11$
$D$	$4$	$4$	$7$	$8$

Commodity	Quantity	Price
Commodity	Quantity	$2000$	$2015$
Wheat	$20$	$15$	$25$
Rice	$8$	$20$	$24$
Ghee	$2$	$160$	$200$
Sugar	$4$	$40$	$40$

Commodities	Price per unit for the current year	Price per unit for the year $2015$	Weights
A	$25$	$20$	$20$
B	$33$	$30$	$15$
C	$42$	$35$	$8$
D	$30$	$25$	$12$

Explain the problems in Construction of Index numbers

Important Questions on Index Numbers

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Commodity	Year $2016$		Year $2017$
Commodity	Price	Quantity	Price	Quantity
A	$6$	$42500$	$3$	$23100$
B	$4.2$	$13680$	$5.3$	$12450$
C	$5$	$36320$	$7$	$23065$
D	$2.7$	$23140$	$10$	$80400$
E	$4$	$15700$	$8$	$11600$

Explain the problems in Construction of Index numbers

Important Questions on Index Numbers

Learn and Prepare for any exam you want !

Explain the problems in Construction of Index numbers