Index Numbers are used to measure the magnitude of economic changes over time. They have the following limitations;
- Choosing a suitable base period
- Index could be misleading as taste and availability of a certain good can change overtime.
-They provide approximate results and are not exact.
There is no doubt that index number are very useful for the purpose for which they are computed yet suffer from the following limitations:Index numbers are not exact. The methods which are employed in the construction of index number are not 100% correct. They give only the approximate results. We therefore, cannot see the true picture of the general level of prices.
As it is not possible to include all conceivable types of goods while computing the price index number, the results will obviously be false.International comparison of the general level of prices is also not an easy task. While computing the international price index number, the base period the quality and the quantity of the commodity should be the same.
It is very difficult to devise appropriate weights to the articles of consumption. The determination of the weight of importance is purely objective. So there is bound to be different in the assigning of weight to different commodities at different places.
There is no doubt that the construction of index number is beset with many practical difficulties but this cannot be denied that changes in the value of money over short periods can be measured with the help of index number.
1. Since construction of almost all index numbers is based on sampling there for the sampling errors creep in to their calculations