Page 256 - DMGT404 RESEARCH_METHODOLOGY

Research Methodology

Notes 11.8 Limitations of Index Numbers

Despite the fact that index numbers are very useful for the measurement of relative changes,
these suffer from the following limitations:

1. The computation of an index number is based on the data obtained from a sample, which
may not be a true representative of the universe.
2. The composition of the bundle of commodities may be for different years. This cannot be
taken into account by the fixed base method. Although this difficulty can be overcome by
the use of chain base index numbers, but their calculations are quite cumbersome.
3. An index number doesn’t take into account the quality of the items. Since a superior item
generally has a higher price and the increase in index may be due to an improvement in
the quality of the items and not due to rise of prices.
4. Index numbers are specialised averages and as such these also suffer from all the limitations
of an average.

5. An index number can be computed by using a number of formulae and different formulae
will give different results. Unless a proper method is used, the results are likely to be
inaccurate and misleading.
6. By the choice of a wrong base period or weighing system, the results of the index number
can be manipulated and, thus, are likely to be misused.
Self Assessment

Fill in the blanks:
15. An index number doesn’t take into account the ……………..of the items.
16. Index number computed by using a number of formulae will give …………….results

11.9 Summary

 An index number is a device for comparing the general level of magnitude of a group of
distinct, but related, variables in two or more situations
 Simple Average of Price Relatives Index

å p 1
P = p 0 (using A.M.)
01
n
é p 1 ù
ê å log ´ 100 ú
P = Antilog ê p 0 ú
01
ê n ú (using G.M.)
ê ú
ë û
å p
Simple Aggregative Index P = 1 ´ 100
 01 å p 0

 Weighted Average of Price relatives Index
å Pw
P =
01
å w (using weighted A.M.)

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