Question
Many difficulties are faced to prepare index number. Explain any two of them.
Solution
Many problems are faced while constructing an index number. Two of them are as follows:
1. Selection of base year : The first problem which arises while preparing index number is the selection of base year. Which year should be selected as a base? While selecting a base year, we should remember that it should be a normal period. It should not be either too short or too long. It should be free from all sorts of abnormalities or irregular fluctuations.
2. Selection of items : We should also be careful in selecting the items to be included in
the index number. Items selected should be relevant to the purpose of the index. The items should be standardized which are easy to describe and understand. Moreover, the total number of commodities selected for the index should be neither too small nor too large.
