What Are The Steps In Construction Of Index Numbers?

Its construction is a quite difficult process.
Purpose of index number:
The most important element which affects all the other factors while constructing the index number is the fixation f object of index number. If we do not have the purpose in mind, the selection of commodities, selection of market and selection of base period is merely useless.

Selection of commodities:
Selection of commodities depends upon the object of index number. If the purpose of index number is to know the general tendency of price level, then a large number of commodities will be selected and each commodity must represent one class of it. For the construction of an index number, it is necessary to include only those commodities which are most commonly to be constructed.

Selection of market:
Selection of markets also plays a very important role in the construction of index number. If we are to prepare the cost of living index number of middle class people, we will have to select those markets where this group of people generally goes for shopping. For measuring of price level of agricultural commodities, the market for the chosen commodity is to be selected only.
Choice of base period:
In the calculation of an index number of prices, a certain years are to be taken as base period.

1,selection of commodites to be included,their number and price quotation
2,selection of base period.
3,selection of average to be used.
4,selection of appropriate weights.

An index number is a number that measures a relative change in a variable or an average relative change in a group of related variables with respect to a base. Six steps are involved in the selection of an index numbers including purpose and scope, selection of items, collection of prices, selection of base period, choice of average and selection of weights. The purpose for which the index number is constructed must be clearly defined. It is not possible to include all the commodities in the construction of an index number, therefore, a reasonable number of relatively important commodities should be included. The prices of the selected commodities are to be carefully collected from the markets where the quantity is marketed in large quantity. A base period is a period with whose reference the changes are measured. There are two methods of selecting a base period that are fix base method and chain base methods. The relatives computed by the fix base method or chain base methods are then averaged to get the index number. It is evident that all the commodities included in the construction of index numbers cannot be of equal importance. Therefore, appropriate weights should be given to different commodities keeping in view their relative importance.