Limitations of Index Number

Limitations of Index Number

Index number construction involves number of limitation or problem which includes purpose specification, data collection, and base selection.

1.    Index number Purposes

Index number purpose definition is first step in index number construction. The purpose of index number calculation or construction must be clear. The index number calculated for one purpose cannot interpret used for other purpose.

2.    Data Collection

Index number calculation requires a lot of data and therefore a lot of resources are required to collect data. It is not only the data collection, but more importantly the accuracy of data, and therefore a great care is required during the lot collection of data.

3.    Index Number base Selection

Index number base selection is also a difficult task, there are number of consideration for index number base selection. There are advantages and disadvantages of each base selection method, therefore a careful analyses is required for selection of right base.

4. Index Number only Estimates

Index number results are only estimates and cannot explain or represent the actual situation. Thus index number should not be over relied for decision making.

5. Manipulation is Possible

Index number can easily be manipulated . for example a desired result can be produced by selecting a base year.