Index Providers have a difficult task ahead of them and many believe that this will affect their growth. There are many problems when it comes to Index Calculation. We will be highlighting the top five problems with Index Calculation in this article. These are:
Base Period Selection
The selection of the base years is the first problem. It is difficult to find the base year, which should be normal. Problem is that a normal year today can be tomorrow’s abnormal year. No one has control over this. It is not possible or advisable to keep the same year throughout the year.
Selection Of Commodities
Another problem is choosing a representative commodity to be included in the index number. It is not as simple as it seems. As many people consume the same commodities, there is a large selection of commodities to choose from. The representative commodities of the past decade may not be current, which can create another problem. Representation is difficult because the consumption patterns of consumers are susceptible to changing.
Collection Of Prices
Another issue is how to get the correct prices and the right price. It can be difficult to find both the correct and the appropriate prices from the same place or the same source. The wholesale and retail prices can also differ, which is a problem because there are many variations in retail prices. Index numbers are often based on wholesale prices.
Arbitrary Weight Assigning
Another problem is the possibility of different weights being allotted for different commodities. It is just not possible to choose the heavier weight for one commodity but a more slender weight for another. There is no set weightage for different commodities. This is an estimate that is arbitrary.
The economy is constantly changing. Changes are occurring on a regular basis in the economy, whether it is in the commodities themselves or in the consumption patterns of individuals. All credit for these changes goes to technology. The problem arises when many commodities are not included in the list of commodities used to prepare the index numbers. The index numbers that are based upon the old commodities become a little less real.
These are the Top 5 Problems with Index Calculation. Although there are solutions to all of these problems, it can sometimes be difficult to implement them. These are just a few of the many problems that index calculation can face.