How The Index Numbers Are Constructed?


Answer:
The construction of index number is quite a complicated process. The main steps required for its technical construction are purpose of index number, test of commodities, selection of markets, price quotation, and choice of base extent, selection of averages and choice of weight. The most important constituent which affects all other factors while constructing the index number is the fixation of object of index number. Of we do not enjoy any purpose in mind, the selection of commodities, selection of market and selection of base period is merely useless.

The second is inspection of commodities depends upon the object of index number. If the purpose of index number is to know the general tendency of price horizontal then a large number of commodities will be selected and respectively commodity must represent one class of it. For the construction of an index number, it is necessary to include only those commodities which are most commonly used by the class of people for whom the index number is to be constructed. For instance if the cost of living index number for the labor is to be prepared afterwards the number of selected commodities should be really representative of the labor group only.
Its construction is a quite difficult process.
Purpose of index number:
The most far-reaching element which affects all the other factors while constructing the index number is the fixation f point of index number. If we do not have the purpose in mind, the selection of commodities, inspection of market and selection of base spell is merely useless.

Selection of commodities:
Selection of commodities depends upon the object of index number. If the purpose of index number is to know the general tendency of price horizontal, then a large number of commodities will be selected and respectively commodity must represent one class of it. For the construction of an index number, it is necessary to include only those commodities which are most commonly to be constructed.

Selection of market:
Selection of market also plays a very important role in the construction of index number. If we are to prepare the cost of living index number of middle class individuals, we will have to select those markets where this group of family generally goes for shopping. For measuring of price horizontal of agricultural commodities, the market for the chosen commodity is to be selected only.
Choice of remains period:
In the calculation of an index number of prices, a certain years are to be taken as stub period.

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