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What Are The Problems In The Construction Of Index Numbers?

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Muhammad Abdullah786 Profile
Index numbers are not constructed simply for measuring changes in the value of money and cost of living. They can be employed for measuring any quantitative changes, say, in wages, in imports, exports, employment, industrial activity etc. the main difficulties which arise in the construction of index numbers are as:It is very difficult to assign weight to each commodity according to its importance in national consumption. Wheat assumes more importance in the laboring class budgets than in those of rich persons.

A further difficulty arises out of the fact that people may buy different commodities from years to years. Changes in forecasting and taste may change the circle of consumption. Many commodities which have considered being luxuries in 1914 are regarded as necessities in theses days. So the index number constructed for measuring the changes in the value of money does not give us a correct indication of its changes.

Another difficulty which is associated with the construction of index number is the choice of a base year. The base year shall be a year of normal economic activity.The cost of living index number is beet with the difficulty that different classes use different commodities in different proportions. Speaking truly, we should constructed the cost of living index for every person, every family, every class, due to the changes in their tastes, customs etc. but if we begin preparing cost of living index for every person and every family, then there will be no end to it.
Nouman Umar Profile
Nouman Umar answered
Index numbers are not constructed simply for measuring changes in the value of money and cost of living. They can be employed for measuring any quantitative changes say in wages, imports, exports, employment and industrial activity. There are many difficulties in the construction of index numbers. It is very difficult to assist weight to each commodity according to its importance in national consumption. Wheat assumes more importance in the laboring class budgets than in those of rich persons. Cars in America have high significance than what they have in Pakistan. Even in Pakistan different people assign different weights to cars. The same difficulty arises in the case of other commodities which we use.

A further difficulty arises out of the fact that people may buy different commodities from year to year. Changes in forecasting and taste may change the circle of consumption. Many commodities which were considered to be luxuries in 1914 are regarded as necessities in these days. So the index number constructed for measuring the changes in the value of money does not give us a correct indication of its changes. Another difficulty which is associated with the construction of index number is the choice of a base year. The base year shall be a year of normal economic activity.
Anonymous Profile
Anonymous answered
The date in which pakistan first time use index number

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