Page 255 - DMGT404 RESEARCH_METHODOLOGY

Unit 11: Index Numbers

The following points should be kept in mind in selecting the type of items: Notes
(a) The items should be representative of the tastes, habits and customs of the people
for whom the index is to be constructed.

(b) The selected items should be of stable quality. The standardised items should be
given preference.
(c) As far as possible, the non-tangible items like personal services, goodwill, etc.,
should be excluded because it is difficult to ascertain their value.
4. Collection of data: The next important step in the construction of an index number is the
collection of data. For example, for the construction of price index, price quotations are to
be obtained. Since the prices of commodities may vary from one market to another and in
certain cases from one shop to another, it is necessary to select those markets which are
representative in the sense that the group under consideration generally make purchases
from these markets. The next logical step is to select an agency through which price
quotations are to be obtained. The selected agency should be highly reliable and if necessary
the accuracy of price quotations reported by it may also be checked by appointing some
other agency or agencies. Furthermore, care should always be taken to obtain price
quotations for the same quality of items.
Similar type of considerations are necessary for the collection of data for the construction
of index numbers such as quantity index, value index, unemployment index, etc.

5. Selection of a suitable average: Since the index numbers are also averages, any of the five
averages, viz. arithmetic mean, median, mode, geometric mean and harmonic mean can
be used in its construction. However, since in most of the situations we have to average
ratios of the values in current period to that in base period, geometric mean is the most
suitable average in the construction of index numbers. The main difficulty of using the
geometric mean is the complexities of its computations and hence, the use of arithmetic
mean is more popular in spite of its being less suitable.
6. Selection of suitable weights: According to John I. Griffin, “Weighing is designed to give
component series an importance in proper relation to their real significance.” The basic
purpose of weighing is to enable each item to have an influence, on the index number, in
proportion to its importance in the group. It is, therefore, necessary to design a system of
weighing such that true importance of the items is reflected by it. The system of weighing
may be either arbitrary or rational. Arbitrary or chance weighing implies that the
statistician is free to assign weights to different items as he thinks fit or reasonable.
Rational or logical weighing, on the other hand, implies that some criterion has been
fixed for assigning weights. Two types of weights are commonly used in the construction
of a price index number: (i) physical quantities and (ii) money values. These weights can
be quantities (or values) produced or consumed or sold in base or current or in any other
period.

Another problem, to be tackled, with regard to system of weights is whether weights
should be fixed or fluctuating. When relative importance of various items change in
different periods, it is desirable to have fluctuating system of weights to get better results.
Self Assessment

Fill in the blanks:
13. Every index number is constructed with reference to a …………..period.
14. The basic purpose of …………..is to enable each item to have an influence, on the index
number, in proportion to its importance in the group.

LOVELY PROFESSIONAL UNIVERSITY 249