Explain the precautions that are to be taken while constructing index numbers.
Explain the precautions that are to be taken while constructing index numbers.
Following precautions are to be taken while constructing index numbers:
(i) Purpose of the index: The first precaution which is to be taken while constructing the index number is the purpose of the index number. Calculation of a volume index will be appropriate when one needs a value index. The selection of items and their prices depend on the purpose of index numbers.
(ii) Selecting of the items: The second precaution which is to be taken while constructing index number is the 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 standardized and representative of the whole group for which index number is to be constructed.
(iii) Price quotation: The next precaution is to obtain the price quotation for the commodities selected. We know that prices 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 the index number.
(iv) Selection of base year: Another precaution in the construction of index number is the selection of a proper base year. The 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 be too distinct in the past. It should be a year of recent past. It should not be too long nor too short.
Following precautions are to be taken while constructing index numbers:
(i) Purpose of the index: The first precaution which is to be taken while constructing the index number is the purpose of the index number. Calculation of a volume index will be appropriate when one needs a value index. The selection of items and their prices depend on the purpose of index numbers.
(ii) Selecting of the items: The second precaution which is to be taken while constructing index number is the 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 standardized and representative of the whole group for which index number is to be constructed.
(iii) Price quotation: The next precaution is to obtain the price quotation for the commodities selected. We know that prices 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 the index number.
(iv) Selection of base year: Another precaution in the construction of index number is the selection of a proper base year. The 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 be too distinct in the past. It should be a year of recent past. It should not be too long nor too short.
