Question

State with reason whether you agree or disagree with the following statement:

There are no limitations of Index Number.

Answer 1

I disagree with this statement.

Reasons: The following are some of the limitations of index numbers:

1. Based on samples: In general, index numbers are derived from samples. We are unable to incorporate every component while creating index numbers. As a result, sampling errors affect index numbers.
2. Bias in the data: Index numbers are derived from several forms of data, which may be incomplete. There could be bias in the data collected. This is almost certainly going to have a negative impact on the index numbers.
3. Defects in formulae: There is no perfect formula for the construction of an index number. It is only an average, and so it has all the limitations of an average.

Thus, index numbers are not free from limitations.