Question

What are the limitations of index numbers?

Answer 1

Limitations of Index Numbers. They are simply rough indications of the relative changes. The choice of representative commodities may lead to fallacious conclusions as they are based on samples. There may be errors in the choice of base periods or weights, etc.

Answer 2

The limitations of index numbers are as follows:

1. Selection of a base year: It is very difficult to select the base year to calculate the index numbers. Basically, two factors are considered while selecting the base year i.e. stability and close to the year of comparison. It is very difficult to find a base year which is normal in nature.

2. Collection of data: Calculation and interpretation of the results with the help of index numbers are completely dependent upon the collected data. It is very difficult to find out reliable and accurate data which again adds limitation to the index numbers.

3. Selection of Prices: Whether to go in for retail prices or wholesale prices is another limitation in the journey of index numbers. As far as general price level is concerned, wholesale prices are considered relevant which are easy to collect also. But in contrary, for consumer based information, retail prices serve the purpose.

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