2. • 1. THE PURPOSE OF THE INDEX:
-- THE INDEX MUST BE VERY CLEARLY, DECIDED
– WHAT THE INDEX IS TO MEASURES AND WHY?
-- EVERY INDEX IS OF LIMITED AND PARTICULAR USE.
3. 2. SELECTION OF A BASE PERIOD.
Whenever index numbers are constructed a reference is made to some base period.
The base period of an index number (also called the reference period) is the period
against which comparisons are made.:
(i) The base period should be normal one.
The period that is selected as base should be normal, i.e., it should be free from
abnormalities like wars, earthquakes, famines, booms, depressions, etc. However,
at times it is really difficult to select year which is normal in all respects – a year
which is normal in one respect may be abnormal in another .
4. (II) THE BASE PERIOD SHOULD NOT BE TOO DISTANT IN THE PAST.
It Is Desirable To Have An Index Based On A Fairly Recent Period, Since
Comparison With A Familiar Set Of Circumstances Is More Helpful Than
Comparison With Vaguely Remembered Conditions.
(III) FIXED BASE OR CHAIN BASE.
While Selecting The Base A Decision Has To Be Made As To Whether
The Base Shall Remain Fixed Or Not, I.E., Whether We Have A Fixed Base Or
Chain Base Index.
5. 3. SELECTION OF APPROPRIATE WEIGHTS.
-- The term ‘weight’ refers to the relative importance
-- This is done by allocating weights. Thus, in the former case, no specific weights are
assigned whereas in the latter case specific weights are assigned to various items.
-- Giving equal importance to all the items and hence weights are unity. It is, therefore,
necessary to adopt some importance to all the items and hence weights are unity. It is,
therefore, necessary to adopt some suitable method of weighting so that arbitrary and
haphazard weights may not affect the results.
6. ISSUES IN USING INDEX NUMBERS
Generalizing from a specific Index:
-- CPI ( How prices of particular combination of goods for particular Income people
Lack Of General Knowledge:
-- Detailed statements about concerning measurements.
Effect of Time Span on an Index:
-- Factors related to Index tend to change with Time
Quality Changes:
-- do not represent quality
