Index Provider has a hard task in hand and many speculate their growth to be affected by the same. When it comes to Index Calculation, there are a lot of problems that are faced. Here in this article we will highlight the top 5 problems associated with Index Calculation. These are as follows:
Selection of Base Period
The first problem pertains to the selection of the base year. The base year ought to be normal but is hard to determine. The problem remains that today a normal year can tomorrow be the abnormal year, over which no one has any command. Thus, keeping the same year as the normal one throughout is neither advisable nor feasible.
Selection of Commodities
To select a representative commodity for the index number is one of the other major problems that is faced. Making the choice of the representative commodities is not that easy a task as it might appear. There is a wide range of commodities from which the choice needs to be made as a lot of people consume the same. Representative commodities of the last decade might not be the representative today, which is another problem. The consumption pattern is liable to change of the consumers which makes representation a difficult task.
Collection of Prices
Another problem that is faced here is the difficulty is in collecting the adequate as well as the accurate prices. It is ideally hard to get the both from the same place as well as the same source. There is also a difference between the wholesale and the retail prices that further cause problem as there are a lot of variations in the retail prices. Thus, index numbers are usually based on the wholesale prices.
Arbitrary Weight Assigning
Varying weights to be allotted to different commodities is another problem. It is simply arbitrary to select the higher weight for one commodity and comparatively a lower weight for another. There are ideally no fixed criteria to give weightage o the different commodities. This is simply an estimation that is arbitrary.
There are constant changes that keep taking place in the economy. Be it in terms of the nature of commodities or the intake or consumption pattern of the individuals, there are changes taking place on the regular basis and all the credit goes to the advancement in technology. This raises the problem when a lot of commodities remain out of the reach of the list of commodities that is used for preparing the index numbers. This further makes the index numbers that are based on the old commodities a little unreal.
All in all, these are the Top 5 Problems Associated with Index Calculation. Though there are solutions for all the problems but it can be hard to apply at times. Apart from these, there may be some other problems also that are faced while index calculation but these are the most prominent ones that cannot be ignored.
The author is a person having a great command over numbers, Index Calculation and speculation. The author believes similar to Index Provider that knowing problems and limitations associated with things is a must so that these can be avoided in the short run to avoid these in the longer time run and ensure smooth running of the company.