 Hello and welcome to the session. In this session we will discuss problems in the construction of index numbers. Now number of problems come up while constructing the index numbers. The important among with reference to price index numbers are as follows. First problem is the purpose or object or index number. Now the index numbers are of many types as they are constructed for different purposes. So it is very important to fix the purpose and no index number can serve for all purposes. So we can say the purpose for which an index number is constructed must be clearly defined. For example if you want to construct the index numbers for economy, vehicle classes then there is no point in including the luxury coach. Now the second one is the selection of items. Now another important problem is the selection of items as the number of components of a system is generally very large. So while making a selection of items only those items should be selected which represent the taste, habit, custom and needs of the related group of people. So we select only those items that is we select only a few relevant and important items which are widely used by the class of persons for whom the index number is to be constructed. Next is the selection of the quotations. Now obtaining a regular quotation that is the statement of values of selected items such as prices, production figures etc also faces a problem. Now the quotations received from different sources such as standard trade journals, government publications, production centres etc are averaged to get the final quotation of that time and a care is taken to make sure that price relates to the same quantity of the item. So we can write when the quotations that is the statement of values received from different sources are averaged to give the final quotation of that time which is or which is to be used in the construction the index number. Now the next problem is the selection of base year. Now the standard time or case is used to make comparisons is called the base. Now every index number must have a base. Now the formula things are kept in mind for selecting a base year and the first one is the base year should be a normal year and no unusual events like earthquake, flood, war etc should have taken place in that year. Secondly it should not be very far in the past that is it should be close to the current scheme. Now the base maybe of the following types first is the fixed base. Now the prices of a particular year selected as a base period are taken to be 100 that is the index number of a base year is always taken as 100 and the changes in the prices of subsequent years are shown as the percentages of the base. Second is the average base. Now when it is difficult to select a fixed base then the average of several years is considered to reduce the influence of normalties. Next is the chain base. Now here the previous year is taken as the base year for the current year. The change is calculated percentage of that year. So we can say in this method instead of having a fixed base year a system of chain base is used. For example the year 1997 will be the base year for the year 1998 and then 1998 will be the base year for 1999 and so on and since no normal year is there so the long period comparison cannot be made. Now next is the selection of an average. Now we know that index numbers are specialized averages. Now as it is a specialized average and from mean, mode, medium, geometric mean or harmonic mean unsymmetric mean and geometric mean are used and here the unsymmetric mean is most commonly used as it is easier to calculate and understand and medium, mode and harmonic mean are almost never used and the geometric mean is considered to be the best as an average of relatives in the construction of index numbers as index numbers are concerned with the relative changes. Now next is the selection of weights. Sometimes all commodities included in the construction of index numbers do not have equal importance therefore weights are assigned to them according to their importance. Now there are two main weights, weighting and second is explicit weighting. Weighting is implied by the nature of commodities, letters and important commodity may be included four times and the explicit weights are numbers assigned to the various items proportionately their relative degree of importance. The selection of an appropriate formula. Now different formula can be used in the construction of index numbers but the statistician has to choose a formula which is most appropriate and the selection depends upon the purpose of index number and availability of data nature of inquiry. In addition you have learned about the problems in the construction of index numbers. And this completes our session hope you all have enjoyed the session.