What Are The Difficulties In The Construction Of Index Number?

What Are The Difficulties In The Construction Of Index Number
Selection of items : Collection of data is the main problem in constructing index number, as there is a large variety of goods and prices. If the number of the commodities is too large, a choice of some representative items has to be made.

What is index number and its problems?

An index number is a statistical device for measuring changes in the magnitude of a group of related variables. It represents the general trend of diverging ratios, from which it is calculated. It is a measure of the average change in a group of related variables over two different situations.

What are the two limitations of index number?

Write any two limitations of index numbers. (i) Weightage to different items often has a blend of personal bias. (ii) They are only estimates.

What is construction of index number?

In general, construction of index number is further available for the division in two parts: Simple and Weighted. Furthermore, the simple method is classified into simple aggregative and simple relative. Similarly, the weighted method is classified into weighted aggregative and weighted average or relative.

What is the index problem in economics?

Index number problem – The index number problem is the term used by economists to describe the limitation of statistical indexing, when used as a measurement for cost-of-living increases. For example, in the Consumer Price Index, a reference year’s “market basket” is assigned an index number of 100.

In 2019 if a market basket price is 55 and the basket were to double the following year, in 2020, then the index would rise to 200. This is done by performing a simple calculation: Dividing the new year market basket price by the reference year’s (otherwise known as the base year) price, and subsequently multiplying the quotient by 100.

While the CPI is a conventional method to measure inflation, it doesn’t express how price changes directly affect all consumer purchases of goods and services. It either understates or overstates cost-of-living increases. This is the limitation of the CPI that is described as the index number problem.

What are the three types of index number?

There are broadly three types of index numbers – price index numbers, value index numbers, and quantity index numbers.

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What are some problems with the measurement of the Consumer Price Index?

It may constitute a relatively good measure of price changes in the specific goods in its basket. However, one limitation of the CPI is that the consumer goods it considers do not represent all production or consumption in the economy. Therefore, as a basic economic barometer, the CPI is inherently flawed.

What are the steps involved in construction of price index number?

Following are the steps/stages/principles/Fleads. involved:- 1. Purpose and the scope 2. Selection of base period 3. Selection of commodities or items 4. Obtaining price quotations 5. Choice of an average 6. Selection of weights 7. Selection of suitable formula 1.

  1. Purpose and scope:- At the very outset the purpose for which the index numbers is being constructed should be clearly defined.
  2. Since most of the latter problems will depend upon purpose, because the selection of items, base year, formulae will be different for different purposes.
  3. The purpose may be such as cost of living index number for urban areas, rural areas, factory workers etc.

should be clearly defined. Also, it is necessary to state the scope of the index numbers such as, geographical region, time, Income etc.2. Selection of the Base year: – Index numbers are always constructed with reference to some period called base period.

  1. The period may be a year, a month, week or a day.
  2. Following points are to be considered while selecting the base year.
  3. The base period selected should be Normal one, that is economically stable.
  4. It should be free from wars, floods, famine, booms, depressions, which affects the economic activities.
  5. Also the base year selected should not be too long or too short distance.

Since economic activities are always dynamic. While selecting the base year, decision has to make whether fixed base or chain base year to be selected. In fixed base year, if the period of comparison is kept fixed for all current years, it is called fixed-base period.

Where as in chain base year, comparison is made always with the previous year.3. Selection of items: – Items means sample of representative commodities/ items, required for day to day living, which are included in the construction of index number. According to the tastes, habits, customs and traditions etc., of working class people should be selected.

It is also necessary to decide the grade or quality of items.4. Obtaining price quotations: – After selecting the commodities/ items, the next problem is to fix the prices for the items selected. Since prices vary from place to place, and even from shop to shop in the same market.

Hence the suitable way is to obtain the prices ascertained by Marketing inspectors, Super Bazaars, Co-operative Societies or took out the average prices collected by various shops or places where concerned.5. Choice of an average:- Since index numbers are specialised averages so, in the construction of index numbers, suitable average should be used.

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The choice is made between Arithmetic mean and Geometric mean. Usually Arithmetic mean with weighted averages is popularly applied, but when accuracy is required Geometric mean is suitable.6. Selection of Weights:- Weight of the items means, the relative importance of an items used in the construction of index number.

Since all items are not equally important in day-today usage. Proper weights should be attached to the various items depending on their relative importance, eg: Sugar-Rice, Atta-Salt etc. Mostly these weights are quantities in the base period or, those in the current period are considered. Sometimes a combination of quantities of different time periods may be used as weights.7.

Selection of formula:- A large number of formulae have been devised for construction of Index numbers. Hence a reasonable formula/ method suitable to the object and the data available should be selected.

What are the limitations of indexing?

Overview – An index is a schema object that contains keys from various columns of our data table. B-Trees are used to store the index keys. It helps us find the rows or the values to be searched faster. They have various advantages like increased performance in searching for records, sorting records, grouping records, or maintaining a unique column.

What are the limitations of index number 12?

– Limitations of index numbers : Index numbers are useful in practice. However they suffer from certain limitations. Therefore, they are not completely reliable.1) Based on samples : Index numbers are generally based on samples. We cannot include all the items in the construction of the index numbers.

Hence they are not free from sampling errors.2) Bias in the data : Index numbers are constructed on the basis of various types of data which may be incomplete. There may be bias in the data collected. This is bound to affect the results of the index numbers.3) Misuse of Index Numbers : Index numbers can be misused.

They compare a situation in the current year with a situation in the base year. Hence a person may choose a base year which will be suitable for his purpose. For example, a businessman may choose a year in which his profit is high as the base year and show that his profit is falling in the current years.4) Defects in formulae : There is no perfect formula for the construction of an index number.

It is only an average and so it has all the limitations of an average.5) Changes in the economy : The habits, tastes and expectations of the people in a country are always changing and all these changes cannot be included in the estimation of index numbers.6) Qualitative changes : The price or quantity index numbers may ignore the changes in qualities of the products.

At any given time, a better quality commodity will have a higher production cost and a higher price than an ordinary commodity which is a substitute for the better product.7) Arbitrary weights : The weights assigned to different commodities may be arbitrary.8) Limited scope : An index number has limited scope because if it is constructed for one purpose then it cannot be used for any other purpose.

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What are the advantages and disadvantages of indexing?

Summary –

Index investing is a passive investment method achieved by investing in an index fund. The benefits of index investing include low cost, requires little financial knowledge, convenience, and provides diversification. Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition). To index invest, find an index, find a fund tracking that index, and then find a broker to buy shares in that fund.

How many methods of construction index number are there?

Methods of Construction of Index Numbers – There are two ways to generate an index number. It can be calculated using both the aggregative and relative averaging methods. In general, there are two types of index number construction: The sub-types of each are shown below. What Are The Difficulties In The Construction Of Index Number This method of construction is used to calculate the index price. As a result, the total cost of a commodity is expressed as a percentage of the total cost in the base year. This approach involves adding the prices of various current-year items, dividing the total by the sum of prices for base-year items, and multiplying by \(100\). \(P_ =\frac } } \times 100\)

  • \(p_ -\) Current year prices for various commodities
  • \(p_ -\) Base year prices for various commodities
  • \(P_ -\) Price Index number

The simple aggregative index is straightforward to comprehend. This strategy, however, has a significant flaw. In this case, the first commodity has greater influence than the other two. This is because the first commodity is more expensive than the others.

What are the uses of construction of index numbers?

An index number is a device for measuring changes in a variable ora group of related variables. The index number of industrial activity enables us to study the progress of industrialization in the country. These cost of living index numbers show changes in the prices of goods generally consumed by people.

What is called index number?

Index numbers are meant to study the change in the effects of such factors or variable (or a group of variables) over a specified time, which cannot be measured directly. Following types of index numbers are generally used: i. Price Index Numbers: These index numbers show changes in the wholesale or retail prices.

What is index number and what are its uses?

An index number in statistics is a tool that we generally use to measure the difference in relative changes from time to time. The difference can also be from place to place. It can be thought of as the arithmetic mean that we use to find or represent some values of a particular data set.

Whats the definition of an index?

: a list of items (such as topics or names) treated in a printed work that gives for each item the page number where it may be found.