Page 67 - VIRANSH COACHING CLASSES

5) Apply the given formula :
index consisting of 50 well-established
and financially sound companies listed on P = Σp q × 100
1 1
Σp q
National Stock Exchange of India (NSE). 01 0 1
The base year of Nifty is taken as 1995. P = 134 × 100 = 212.69
01 63
Hermann Paasche : German economist Hermann Thus, Paasche’s index P = 212.69
01
Paasche (1851-1925) developed Find out :
an index for measuring current
price or quantity levels relative • List of crops included in the Index of
to those of a selected base period. Agricultural Production in India.
Paasche’s index uses current- • List of products included in the Index of
period weighting. Industrial Production in India.
2) Paasche’s Price Index Number : In this
technique, quantities of the ‘current year’ Limitations of index numbers :

are considered as weights. Paasche’s Price Index numbers are useful in practice.
Index is calculated as : However they suffer from certain limitations.
Σp q Therefore, they are not completely reliable.
P = 1 1 × 100
01 Σp q 1) Based on samples : Index numbers are
0 1
Ex. 2 : Construct Paasche’s Index for the given generally based on samples. We cannot
data : include all the items in the construction of
Commodities Base year Current year the index numbers. Hence they are not free
p q p q from sampling errors.
0 0 1 1
M 2 10 5 8 2) Bias in the data : Index numbers are
N 4 5 8 3 constructed on the basis of various types of
O 1 7 2 10 data which may be incomplete. There may
P 5 8 10 5
be bias in the data collected. This is bound
Solution : to affect the results of the index numbers.

Commodities Base Current
year year 3) Misuse of Index Numbers : Index numbers
p q p q p q p q can be misused. They compare a situation in
0 0 1 1 1 1 0 1
M 2 10 5 8 40 16 the current year with a situation in the base
N 4 5 8 3 24 12 year. Hence a person may choose a base
O 1 7 2 10 20 10 year which will be suitable for his purpose.
P 5 8 10 5 50 25 For example, a businessman may choose a
Total 134 63
year in which his profit is high as the base
Steps : 1) Find out the product p q of the year and show that his profit is falling in the
1 1
different commodities. current years.
2) Find out the product p q of the different 4) Defects in formulae : There is no perfect
0 1
commodities. formula for the construction of an index
3) Add all the products p q obtained to derive number. It is only an average and so it has
1 1
Σp q . all the limitations of an average.
1 1
4) Add all the products p q obtained to derive 5) Changes in the economy : The habits,
0 1
Σp q . tastes and expectations of the people in
0 1
58