S.Y.J.C.

Economics

Chapter 6

INDEX NUMBERS

Introduction :
Index numbers are one of the most used statistical tools in economics. An index number
is a device to measure changes in an economic variable (or group of variables) over a period
of time. Index numbers were originally developed to measure changes in the price level. In the
present context, it is also used to measure trends in a wide variety of areas that includes stock
market prices, cost of living, industrial and agricultural production, changes in exports and
imports etc. Index numbers are not directly measurable, but represent relative changes.

Q.1 Identify and explain the following concept. [2 marks]

Device for measuring differences in the magnitude of a group of related variables.
Ans Index Number
According to Spiegel, “An index number is a statistical measure designed to show
changes in a variable or a group of related variables with reference to time, geographical
location and other characteristics such as income, profession etc.”
 Index numbers are also called as economic barometers.
 Index number are specialised averages.

Q.2 What are the features of index numbers? [4 marks]

Ans: Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

Features of Index Numbers :

(1) Index numbers are statistical devices.
(2) Index numbers are specialized averages which are capable of being expressed in
percentages.
(3) Index numbers measure the net change in one or more related variables over a
period of time or between two different time periods or two different localities.
(4) Index number which is computed from a single variable is called a ‘univariate
index’, whereas an index which is constructed from a group of variables is called a
‘composite index’.
(5) The year for which the index number is prepared is the current year.
(6) The year with which the changes are measured is called the base year.
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(7) The base year’s index is assumed as 100 and accordingly the value of the current
year is calculated.
(8) Index numbers are also referred to as ‘barometers of economic activity’, since it is
used to measure the trends and changes in the economy.

Base Year and Current Year :

Base Year : The year with respect to which comparisons are made is the base year. It is
denoted by the suffix ‘o’.
Current Year : The year for which comparisons are required to be made is the
current period. It is denoted by the suffix ‘1’.
Notations
p0 = Price of the commodity in the base year
p1 = Price of the commodity in the current year
q0 = Quantity of the commodity consumed or purchased in the base year
q1 = Quantity of the commodity consumed or purchased in the current year

Q.3 Explain the types of index numbers. [4 marks]

Ans Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

Price Index Number

Quantity Index Number

Index Numbers
Value Index Number

Special Purpose Index Number

(1) Price Index Number :

It measures the general changes in the prices of goods. It compares the level
of prices between two different time periods.
(2) Quantity Index Number :
It is also called volume index number. It measures changes in the level of
output or physical volume of production in the economy. For example, changes in
agricultural production, industrial production etc. over a period of time.
(3) Value Index Number :

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The value of a commodity is the product of its price and quantity (p × q).
Value index number measures the changes in the value of a variable in terms of
rupee. It is a more informative index as it combines both, changes in the price as
well as quantity.
(4) Special Purpose Index Number :
They are constructed with some specific purpose. For example, import-export
index numbers, labour productivity index numbers, share price index numbers etc.

Some of the widely used index numbers by the Government of India :

 Consumer Price Index (CPI)
 Wholesale Price Index (WPI)
 Index of Agricultural Production (IAP)
 Index of Industrial Production (IIP)
 Index of Service Production (ISP)
 Index of Export/Import (IEI)
 Human Development Index (HDI)

Q.4 Explain the significance of index numbers in economics. [4 marks]

Ans Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

Significance of Index Numbers in Economics :

Index numbers are indispensable tools of economic analysis. Following points
explain the significance of index numbers :
(1) Framing suitable policies :
Index numbers provide guidelines to policy makers in framing suitable
economic policies such as agricultural policy, industrial policy, fixation of wages
and dearness allowances in accordance with the cost of living etc.
(2) Studies trends and tendencies :
Index numbers are widely used to measure changes in economic variables such
as production, prices, exports, imports etc. over a period of time. For example, by
examining the index of industrial production for the last five years, we can draw
important conclusions about the trend of industrial production whether it shows
an upward tendency or a downward tendency.
(3) Forecasting about future economic activity :
Index numbers are useful for making predictions for the future based on the
analysis of the past and present trends in the economic activities. For example,
based on the available data pertaining to imports and exports, future predictions
can be made. Thus, forecasting guides in proper decision making.
(4) Measurement of inflation :

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Index numbers are also used to measure changes in the price level from time
to time. It enables the government to undertake appropriate anti-inflationary
measures. There is a legal provision to pay the D.A. (dearness allowance) to the
employees in organised sector on the basis of changes in Dearness Index.
(5) Useful to present financial data in real terms :
Deflating means to make adjustments in the original data. Index numbers are
used to adjust price changes, wage changes etc. Thus, deflating helps to present
financial data in real terms (at constant prices).

Q.5 Explain the steps involved in the construction of index numbers. [4 marks]
Ans Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

Following steps are involved in the construction of index numbers :

(1) Purpose of index number :
The purpose for constructing the index number, its scope as well as which
variable is intended to be measured should be clearly decided to achieve fruitful
results.
(2) Selection of the base year :
Base year is also called the reference year. It is the year against which
comparisons are made. The base year should be normal i.e. it should be free from
natural calamities. It should not be too distant in the past.
(3) Selection of items :
It is necessary to select a sample of the number of items to be included in the
construction of a particular index number. For example, in the construction of price
index numbers it is impossible to include each and every commodity. The
commodities to be selected should represent the tastes, habits and customs of the
people. Besides this, only standardized or graded items should be included to give
better results.
(4) Selection of price quotations :
Prices of the selected commodities may vary from place to place and shop to
shop in the same market. Therefore, it is desirable that price quotations should be
obtained from an unbiased price reporting agency. To achieve accuracy, proper
selection of representative places and persons is required.
(5) Choice of a suitable average :
Construction of index numbers requires choice of a suitable average.
Generally, Arithmetic mean is used in the construction of index numbers because
it is simple to compute compared to other averages.
(6) Assigning proper weights :
Weight refers to the relative importance of the different items in the
construction of an index number. Weights are of two types i.e. quantity weights (q)

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and value weights (p x q). Since all items are not of equal importance, by assigning
specific weights, better results can be achieved.
(7) Selection of an appropriate formula :
Various formulae are devised for the construction of index numbers. Choice
of a suitable formula depends upon the purpose of index number and availability
of data.

You should know.

In 2015, the Central Statistical Organisation (CSO) under the Ministry of
Statistics changed the base year for tabulating Gross Domestic Product from 2004-
05 to 2011-12. Periodic rebasing of GDP series every seven to ten years is carried
out to account for the changing economic structure and relative prices. Besides
this, the base year of Index of Industrial Production (IIP) and the base year of
Wholesale Price Index (WPI) has also been changed from 2004-05 to 2011-12. At
present, the process of further rebasing the base year is underway.

Q.6 Explain the methods of constructing Index Numbers. [4 marks]

Ans Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

There are two methods of constructing index numbers:

(a) Simple Index Number
(b) Weighted Index Number

(A) Simple Index Number :

In this method, every commodity is given equal importance. It is the easiest
method of constructing index numbers. This method can be applied to determine
(1) Price Index Number
(2) Quantity Index Number
(3) Value Index Number

(1) Price Index Number :

It is measured as :

P01 
 p1  100
 p0
Where,
 p1  sum total of the prices of the current year
 p0  sum total of the prices of the base year
Example – 1 :

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Construct a Price Index Number using the simple method from the given
data.
Steps :
(1) Add the prices of the different commodities of the base year to derive
 p0 .
(2) Add the prices of the different commodities of the current year to derive
 p1 .
(3) Apply the formula :

Price Index Number P01 

 p1  100
 p0
Commodities Prices in 2010 Prices in 2015
(in `) Base (in `) (Current
year) p0 year) p1
A 20 30
B 60 80
C 100 130
D 40 60
Total  p0  220  p1  300
Price Index Number P01 
 p1  100
 p0
300
P01   100  136.36
220
P01  136.36

(2) Quantity Index Number :

It is measured as

Q01 
 q1  100
 q0
Where,
 q1  sum total of the quantities of the current year
 q0  sum total of the quantities of the base year
Example – 2 :
Construct a Quantity Index Number using the simple method from the given
data.
Steps :
(1) Add the quantities of the different commodities of the base year to
derive  q0 .
(2) Add the quantities of the different commodities of the current year to
derive  q1 .
(3) Apply the formula :
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Quantity Index Number Q01 

 q1  100
 q0
Commodities Qty. in 2000 Qty. in 2001
(in `) Base (in `) (Current
year) q0 year) q1
A 30 45
B 55 70
C 90 105
D 35 60
Total  q0  210  q1  280

Quantity Index Number Q01 

 q1  100
 q0
280
Q01   100  133.33
210
Q01  133.33

(3) Value Index Number :

It is measured as

V01 
 p1q1  100
 p0q0
Where,
 p1q1  sum total of the product of the prices and quantities of the current
year
 p0q0  sum total of the produce of the prices and quantities of the base year
Example – 3 :
Construct a Value Index Number using the simple method from the given
data.
Steps :
(1) Find the product of prices and their respective quantities of the different
commodities for the base year to derive p0 q0 . Take the sum total of the
products to derive  p0q0 .
(2) Find the product of prices and their respective quantities of the different
commodities for the current year to derive p1q1 . Take the sum total of
the products to derive  p1q1 .
(3) Apply the formula :

Value Index Number V01 

 p1q1  100
 p0q0

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Commodities Base Year Current Year

p0 q0 p0 q0 p1 q1 p1q1
P 5 4 20 20 10 200
Q 10 3 20 30 8 240
R 15 2 30 40 6 240
S 20 1 20 50 4 200
Total  p0q0 = 100  p1q1 = 880

Value Index Number V01 

 p1q1  100
 p0q0
880
V01   100  880
100
V01  880

(B) Weighted Index Number :

In this method, suitable weights are assigned to various commodities. It gives
relative importance to the commodity in the group. In most of the cases ‘quantities’
are used as weights. There are various methods of constructing weighted index
number such as Laaspeyre’s Price Index, Paasche’s Price Index etc.

(1) Laaspeyre’s Price Index Number :

German economist Étienne Laspeyres (1834–1913) formulated an index
for measuring current prices or quantities in relation to those of a selected
base period. The distinctive feature of the Laspeyres index is that it uses a
group of commodities purchased in the base period as the basis for
comparison.
In this technique, ‘base year’ quantities are considered as weights.
Laaspeyre’s price index is calculated as :

P01 
 p1q0  100
 p0q0
Example – 1 :
Construct Laaspeyre’s Index for the given data :
Commodities Base Year Current Year
p0 q0 p1 q1
A 20 4 30 6
B 10 5 20 8
C 40 8 60 5
D 30 4 40 4

Solution :
Commodities Base Year Current Year
p0 q0 p1 q1 p1q0 p0 q0

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A 20 4 30 6 120 80
B 10 5 20 8 100 50
C 40 8 60 5 480 320
D 30 4 40 4 160 120
Total 860 570
Steps :
(1) Find out the product p1q0 of the different commodities.
(2) Find out the product p0 q0 of the different commodities.
(3) Add all the products p1q0 obtained to derive  p1q0 .
(4) Add all the products p0 q0 obtained to derive  p0q0 .
(5) Apply the given formula :

P01 
 p1q0  100
 p0q0
860
P01  100  150.87
570
Thus, Laaspeyre’s Index P01  150.87

Do you know?
Sensex and Nifty are stock market indices which represent Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) respectively.
Sensex, also called BSE 30, is the market index consisting of 30 well-
established and financially sound companies listed on Bombay Stock
Exchange (BSE). The base year of Sensex is 1978-79.
Nifty, also called NIFTY 50, is the market index consisting of 50 well-
established and financially sound companies listed on National Stock
Exchange of India (NSE). The base year of Nifty is taken as 1995.

(2) Paasche’s Price Index Number :

German economist Hermann Paasche (1851-1925) developed an index for
measuring current price or quantity levels relative to those of a selected base
period. Paasche’s index uses current- period weighting.
In this technique, quantities of the ‘current year’ are considered as
weights. Paasche’s Price Index is calculated as :

P01 
 p1q1  100
 p0q1
Example – 2 :
Construct Paasche’s Index for the given data :
Commodities Base Year Current Year
p0 q0 p1 q1
M 2 10 5 8
N 4 5 8 3
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O 1 7 2 10
P 5 8 10 5

Solution :
Commodities Base Year Current Year
p0 q0 p1 q1 p1q1 p0 q1
M 2 10 5 8 40 16
N 4 5 8 3 24 12
O 1 7 2 10 20 10
P 5 8 10 5 50 25
Total 134 63

Steps :
(1) Find the product p1q1 of the different commodities.
(2) Find out the product p0 q1 of the different commodities.
(3) Add all the products p1q1 obtained to derive  p1q1 .
(4) Add all the products p0 q1 obtained to derive  p0q1 .
(5) Apply the given formula :

P01 
 p1q1  100
 p0q1
134
P01  100  212.69
63
Thus, Paasche’s Index P01  212.69

Q.7 What are the limitations of index numbers? [4 marks]

Ans Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes in a
variable or a group of related variables with reference to time, geographical location
and other characteristics such as income, profession etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring differences in
the magnitude of a group of related variables.”

Index numbers are useful in practice. However they suffer from certain limitations.
Therefore, they are not completely reliable.
(1) Based on samples :
Index numbers are generally based on samples. We cannot include all the
items in the construction of the index numbers. Hence they are not free from
sampling errors.
(2) Bias in the data :
Index numbers are constructed on the basis of various types of data which
may be incomplete. There may be bias in the data collected. This is bound to affect
the results of the index numbers.
(3) Misuse of Index Numbers :

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Index numbers can be misused. They compare a situation in the current year
with a situation in the base year. Hence a person may choose a base year which
will be suitable for his purpose. For example, a businessman may choose a year in
which his profit is high as the base year and show that his profit is falling in the
current years.
(4) Defects in formulae :
There is no perfect formula for the construction of an index number. It is only
an average and so it has all the limitations of an average.
(5) Changes in the economy :
The habits, tastes and expectations of the people in a country are always
changing and all these changes cannot be included in the estimation of index
numbers.
(6) Qualitative changes :
The price or quantity index numbers may ignore the changes in qualities of
the products. At any given time, a better quality commodity will have a higher
production cost and a higher price than an ordinary commodity which is a
substitute for the better product.
(7) Arbitrary weights :
The weights assigned to different commodities may be arbitrary.
(8) Limited scope :
An index number has limited scope because if it is constructed for one purpose
then it cannot be used for any other purpose.

Textual Exercise and Answers

Q.1 Choose the correct option.

(1) Statements that are incorrect in relation to index numbers.
(a) Index number is a geographical tool.
(b) Index numbers measure changes in the air pressure.
(c) Index numbers measure relative changes in an economic variable.
(d) Index numbers are specialized averages.
Options :
(1) c and d (2) a and b
(3) b and c (4) a and d

(2) Statements that highlight the significance of index numbers.

(a) Index numbers are useful for making future predictions.
(b) Index numbers help in the measurement of inflation.
(c) Index numbers help to frame suitable policies.
(d) Index numbers can be misused.
Options :
(1) b, c and d (2) a, c and d
(3) a, b and d (4) a, b and c

(3) Statements that apply to weighted index numbers

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(a) Every commodity is given equal importance.
(b) It assigns suitable 'weights' to various commodities.
(c) In most of the cases, quantities are used as weights.
(d) Laaspeyre's and Paasche's method is used in the calculation of weighted index
numbers.
Options :
(1) b, c and d (2) a, c and d
(3) a, b and d (4) a, b, c and d

(4) Statements related to limitations of index numbers.

(a) Index numbers are not completely reliable.
(b) There may be a bias in the data collected.
(c) Every formula has some kind of defect.
(d) Index numbers ignore changes in the qualities of products.
Options :
(1) a, c and d (2) a, b, c and d
(3) a, b and d (4) b, c and d

(5) Choose the correct pair :

Group A Group B

(1) Price Index

 p1q0  100
 p0q0
(2) Value Index
 q1  100
 q0
(3) Quantity Index
 p1q1  100
 p0q1
(4) Paasche’s Index
 p1  100
 p0
Options :
(1) 1-d, 2-c, 3-a, 4-b (2) 1-d, 2-a, 3-b, 4-c
(3) 1-b, 2-c, 3-d, 4-a (4) 1-c, 2-d, 3-a, 4-b

Q.2 Complete the correlation :

(1) Price Index : Inflation :: : Agricultural production
(2) : Base year prices :: P1 : Current year prices
(3) Laaspeyre’s Index : :: Paasche’s Index : Current year quantities
(4) : Single variable :: Composite index : Group of variables

Q.3 Solve the following :

(1) Calculate Price Index number from the given data :
Commodity A B C D
Price in 2005 (`) 6 16 24 4
Price in 2010 (`) 8 18 28 6

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(2) Calculate Quantity Index number from the given data :
Commodity P Q R S T
Base year quantities 170 150 100 195 205
Current year quantities 90 70 75 150 95
(3) Calculate Value Index number from the given data :
Commodity Base Year Current Year
Price Quantity Price Quantity
A 40 15 70 20
B 10 12 60 22
C 50 10 90 18
D 20 14 100 16
E 30 13 40 15
(4) Calculate Laaspeyre's and Paasche's index from the given data :
Commodity Base Year Current Year
Price Quantity Price Quantity
X 8 30 12 25
Y 10 42 20 16

Q.4 Distinguish between :

(1) Simple Index Numbers and Weighted Index Numbers.
(2) Price Index and Quantity Index.
(3) Laaspeyre's Index and Paasche's Index.

Q.5 State with reasons whether you agree or disagree with the following statements :
(1) Index numbers measure changes in the price level only.
(2) Index numbers are free from limitations.
(3) Index numbers can be constructed without the base year.

Q.6 Answer the following :

(1) Explain the features of index numbers.
(2) Explain the significance of index numbers in economics

Q.7 Answer in detail :

(1) Explain the steps involved in the construction of index numbers.

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ANSWERS
Q.1 (1) (2)
(2) (4)
(3) (1)
(4) (2)
(5) (2)

Q.2 (1) Quantity index

(2) P0
(3) Base year quantities
(4) Simple index

Q.3 (1)
Commodity Price in 2005 Price in 2010
(Rs.) (Rs.)
A 6 8
B 16 18
C 24 28
D 04 6
50 60

Price Index Number P01 

 P1
 P0
60
P01   100
50
P01  120

(2)
Commodity Base year quantities Current year quantities
P 170 90
Q 150 70
R 100 75
S 195 150
T 205 95
820 480

Quantity Index Number Q01 

 q1  100
 q0
480
=  100
820
= 58.536

(3)
Commodity Base Year Current Year
Price Quantity P0Q0 Price Quantity P1Q1
P0 Q0 P1 Q1
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A 40 15 600 70 20 1400
B 10 12 120 60 22 1320
C 50 10 500 90 18 1620
D 20 14 280 100 16 1600
E 30 13 390 40 15 600
 P0Q0 1890  P1Q1 6540

Value Index Number

V01 
 p1q1  100
 p0q0
6540
V01   100
1890
= 346

(4)
Commodity Base Year Current Year
Price Quantity Price Quantity p0 q0 p1q0
 p0   q0   p1   q1 
X 8 30 12 25 240 360
Y 10 42 20 16 420 840
 p0q0   p1q0 
660 1200
Laaspeyre’s Price Index

P01 
 p1q0  100
 p0q0
1200
P01   100
660
P01  181.81

Q.4 Distinguish between :

(1) Simple Index Numbers and Weighted Index Numbers.
Simple Index Numbers Weighted Index Numbers
(a) Simple index numbers are index (a) In weighted index number,
numbers constructed without weighted aggregate of actual
assigning weights. prices and weighted average of
price relatives are considered.
(b) Simple index number is classified (b) Weighted aggregate of actual
as simple aggregate price index prices and weighted average of
numbers, simple arithmetic mean price relatives are two methods of
of price relatives, simple weighted method. Laspeyre'
geometric mean of price relatives. Paasche and Bowley's formulae
are used for index number.

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(c) It is simple and easy to calculate. (c) It assigns concealed and
improper weights to commodities
and gives a bias result.
p
 p1  100 (d) P01 
 p1q0   p1q1  100
(d) P01 
N
0
 p0q0  p0q1
(e) Data related to price is given. (e) Data related to both price and
quantity is given.
(f) All commodities are given equal (f) All commodities are not given
importance. equal importance.
(g) It does not give a true picture. (g) It gives a true picture.
(h) It is easy to calculate. (h) It is difficult to calculate.

(2) Price Index and Quantity Index.

Price Index Quantity Index
(a) Meaning (a)
Price Index Numbers are those Quantity Index Numbers are
statistical tools that measure the those statistical tools that
changes in the prices. measure the changes in the
quantity.
(b) Calculation (b)
They are calculated by using the They are calculated by using the
quantities as weights. values as weights.
(c) Utility : (c)
They can be used for purpose They can be used only for
other than measuring the changes measuring the changes in the
in the price. quantities.
(d) Objects : (d)
Calculation of Price Index Calculation of quantity index
Numbers helps us to know numbers helps us to know
whether the level of prices is whether the level of production is
rising or falling in comparison to increasing or declining in
the previous year's price. comparison to previous year's
production.

(e) P01 
 P1  100 (e) Q01 
 Q1  100
 P0  Q0
(f) E.g. wholesale prices. (f) E.g. industrial production.

(3) Laaspeyre's Index and Paasche's Index.

Laaspeyre’s Index Paasche’s Index
(a) It is formulated by German (a) It is formulated by German
economist E. Laaspeyre. economist H. Paasche.
(b) It uses base period weighting. (b) It uses current period for
weighting.

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(c) P01 
 p1q0  100 (c) P01 
 p1q1  100
 p0q0  p0q1
(d) It uses a group of commodities (d) It uses a group of commodities in
purchased in the base period as the current year as basis for
basis for comparison. comparison.

Q.5 State with reasons whether you agree or disagree with the following statements :
(1) Index numbers measure changes in the price level only.
Ans I disagree with the above statement.
Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes
in a variable or a group of related variables with reference to time,
geographical location and other characteristics such as income, profession
etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring
differences in the magnitude of a group of related variables.”

Price Index Number

Quantity Index Number

Index Numbers
Value Index Number

Special Purpose Index Number

(2) Index numbers are free from limitations.

Ans I disagree with the above statement.
Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes
in a variable or a group of related variables with reference to time,
geographical location and other characteristics such as income, profession
etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring
differences in the magnitude of a group of related variables.”

Index numbers are useful in practice. However they suffer from certain
limitations. Therefore, they are not completely reliable.
(1) Based on samples :

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Index numbers are generally based on samples. We cannot include all
the items in the construction of the index numbers. Hence they are not free
from sampling errors.
(2) Bias in the data :
Index numbers are constructed on the basis of various types of data
which may be incomplete. There may be bias in the data collected. This is
bound to affect the results of the index numbers.
(3) Misuse of Index Numbers :
Index numbers can be misused. They compare a situation in the current
year with a situation in the base year. Hence a person may choose a base year
which will be suitable for his purpose. For example, a businessman may
choose a year in which his profit is high as the base year and show that his
profit is falling in the current years.
(4) Defects in formulae :
There is no perfect formula for the construction of an index number. It is
only an average and so it has all the limitations of an average.
(5) Changes in the economy :
The habits, tastes and expectations of the people in a country are always
changing and all these changes cannot be included in the estimation of index
numbers.

(3) Index numbers can be constructed without the base year.

Ans I disagree with the above statement.
Definition of Index Numbers :
(1) Spiegel : “An index number is a statistical measure designed to show changes
in a variable or a group of related variables with reference to time,
geographical location and other characteristics such as income, profession
etc.”
(2) Croxton and Cowden : “Index Numbers are devices for measuring
differences in the magnitude of a group of related variables.”

Base year is also called the reference year. It is the year against which
comparisons are made. The base year should be normal i.e. it should be free from
natural calamities. It should not be too distant in the past.

Base Year : The year with respect to which comparisons are made is the base year.
It is denoted by the suffix ‘o’.
Current Year : The year for which comparisons are required to be made is the
current period. It is denoted by the suffix ‘1’.

Q.6 (1) Refer to the notes.

(2) Refer to the notes.

Q.7 (1) Refer to the notes.

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