Question

problem involved in the construction of an index number of prices​

Answer 1

The first difficulty relates to the selection of the base year. The base year should be normal. But it is difficult to determine a truly normal year. Moreover, what may be the normal year today may become an abnormal year after some period. Therefore, it is not advisable to have the same year as the base period for a number of years. Rather, it should be changed after ten years or so. But there is no fixed rule for this.

2. Difficulties in the Selection of Commodities:

The selection of representative commodities for the index number is another difficulty. The choice of representative commodities is not an easy matter. They have to be selected from a wide range of commodities which the majority of people consume. Again, what were representative commodities some ten years ago may not be representative today. The consumption pattern of consumers might change and thereby make the index number useless. So the choice of representative commodities presents real difficulties.

3. Difficulties in the Collection of Prices:

Another difficulty is that of collecting adequate and accurate prices. It is often not possible to get them from the same source or place. Further, the problem of choice between wholesale and retail prices arises. There are much variations in the retail prices. Therefore, index numbers are based on wholesale prices.

4. Arbitrary Assigning of Weights:

In calculating weighted price index, a number of difficulties arise. The problem is to give different weights to commodities. The selection of higher weight for one commodity and a lower weight for another is simply arbitrary. There is no set rule and it entirely depends on the investigator. Moreover, the same commodity may have different importance for different consumers. The importance of commodities also changes with the change in the tastes and incomes of consumers and also with the passage of time. Therefore, weights are to be revised from time to time and not fixed arbitrarily.

5. Difficulty of Selecting the Method of Averaging:

Another difficulty is to select an appropriate method of calculating averages. There are a number of methods which can be used for this purpose. But all methods give different results from one another. It is, therefore, difficult to decide which method to choose.

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