Question

State with reason whether you agree or disagree with the following statement:

Index numbers are free from limitations.

State with reason whether you agree or disagree with the following statement:

There are no limitations to the index numbers.

Options

• Agree

• Disagree

Answer 1

I Disagree with the given statement.

Reason:

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 constructing 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 that will be suitable for his purpose.
4. Defects in formulae: There is no perfect formula for the construction of an index number. It is only an average and 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 the 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 a 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 purposes.