Page 64 - VIRANSH COACHING CLASSES

allowance) to the employees in organised number. For example, in the construction
sector on the basis of changes in Dearness of price index numbers it is impossible to
Index. include each and every commodity. The
5) Useful to present financial data in commodities to be selected should represent
real terms : Deflating means to make the tastes, habits and customs of the people.
adjustments in the original data. Index Besides this, only standardized or graded
numbers are used to adjust price changes, items should be included to give better
wage changes etc. Thus, deflating helps results.
to present financial data in real terms (at 4) Selection of price quotations : Prices of
constant prices). the selected commodities may vary from

Construction of Index Numbers : place to place and shop to shop in the same
Following steps are involved in the market. Therefore, it is desirable that price
construction of index numbers : quotations should be obtained from an
1) Purpose of index number : The purpose unbiased price reporting agency. To achieve
for constructing the index number, its scope accuracy, proper selection of representative
as well as which variable is intended to places and persons is required.
be measured should be clearly decided to 5) Choice of a suitable average : Construction
achieve fruitful results. of index numbers requires choice of a
2) Selection of the base year : Base year is suitable average. Generally, Arithmetic
also called the reference year. It is the year mean is used in the construction of index
against which comparisons are made. The numbers because it is simple to compute
base year should be normal i.e. it should be compared to other averages.
free from natural calamities. It should not 6) Assigning proper weights : Weight
be too distant in the past. refers to the relative importance of the
different items in the construction of an
Do you know? index number. Weights are of two types
In 2015, the Central Statistical i.e. quantity weights (q) and value weights

Organisation (CSO) under the Ministry of (p x q). Since all items are not of equal
Statistics changed the base year for tabulating importance, by assigning specific weights,
Gross Domestic Product from 2004-05 to better results can be achieved.
2011-12. Periodic rebasing of GDP series 7) Selection of an appropriate formula :
every seven to ten years is carried out to Various formulae are devised for the
account for the changing economic structure construction of index numbers. Choice of a
and relative prices. Besides this, the base suitable formula depends upon the purpose
year of Index of Industrial Production (IIP) of index number and availability of data.
and the base year of Wholesale Price Index
(WPI) has also been changed from 2004-05 Methods of Constructing Index Numbers :
to 2011-12. At present, the process of further There are two methods of constructing
index numbers:
rebasing the base year is underway.
a) Simple Index Number
3) Selection of items : It is necessary to select a b) Weighted Index Number
sample of the number of items to be included The following chart explains the methods
in the construction of a particular index of constructing index numbers :

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