Assignment

On
Index Number
Course Title: Business Statistics-507

Submitted To
Mr. Tofayel Ahmed
Lecturer

Submitted By
Md. Talha Talukder
Id: 150364
Section: B

Dhaka School of Bank Management

BIBM, Mirpur-2, Dhaka-1216

Date of Submission: 4 August 2015

Question: Importance and limitations of the index number.

Answer: Index Numbers are used to measure the magnitude of economic changes over time.
They have the following importance and limitations.
Importance:
Measuring changes in prices: The method of index number is used for measuring changes
in price level. The prices of base years are compared to the prices of the current year. To
note the increase in prices. The consumers want to know the rate of inflation.
Adjusting wages and prices: An index number of cost of living can guide us in the
adjustment of wages to the changing prices. The laborers can demand more wages on the
basis of changes in price. The government can revise the pay after regular periods.
Industrial production and business activity: Index numbers may be helpful in judging the
effect of certain policy adopted by the government. To a businessman, they are helpful in
comparing production in his own business with that of industry.
Student: Index numbers are helpful to measure the intelligence of the students. The
teachers can check their efficiency through such index. The Government can want to the
students and take remedial measures for the improvement of students and teachers.
Trade: the volume of trade in one year. Increase and decrease in TRADE INDICATE the
good or bad trade.
Investment index number: Index numbers are helpful in judging the changes in
investment. The stock exchange prepares index numbers to show investment made by the
people from time to time. The investor can buy and sell shares in order to earn more
profit.
Employment: It is useful to note the changes in employment level. The Government. can
increase the employment level by new jobs. The increase in employment means the
economy is developing. Decrease in employment is alarming of the Government. to take
remedial measure.
Limitations:
They are simply rough indications of the relative changes.
The choice of representative commodities may lead to fallacious conclusions as they are
based on samples.
There may be errors in the choice of base periods or weights etc.
Comparisons of changes in variables over long periods are not reliable.
They may be useful for one purpose but not for other.
They are specialized types of averages and hence are subject to all those limitations with
which an average suffers from.

Question: What are the limitations of the unweighted index numbers?

Answer:
Limitations of the unweighted index numbers:
Unweighted index is a method for calculating a stock index that involves finding the average
performance of all stocks in the index, with each performance value being treated equally. It is a
simple arithmetic or geometric average used to calculate stock indexes. The limitation of
unweighted index numbers is that it fails to consider the relative importance of the items
included in the index.

Question: Advantages and the disadvantages of the Laspeyres price index and
Paasche price index.
Answer:
Laspeyres Price Index

Advantages: Require quantity data from only the base period. This allows a more
meaningful comparison over time. The changes in the index can be attributed to the
changes in the price.
Disadvantages: Does not reflect changes in buying patterns over time. Also, it may
overweight goods whose prices increase.

Paasche Price Index

Advantages: Because it uses quantities from the current period, it reflects current buying
habits.
Disadvantages: It requires quantity data from the current years. Because different
quantities are used each year, it is impossible to attribute changes in the index to changes
in price alone. It tends to overweight the goods whose prices have declined. It requires
the prices to be recomputed each year.

Question: Importance of the consumer price index (CPI).

Answer:
Consumer price index is a measure of changes in the purchasing-power of a currency and the rate
of inflation. The consumer price index expresses the current prices of a basket of goods and
services in terms of the prices during the same period in a previous year, to show effect of
inflation on purchasing power. It is one of the best known lagging indicators.
Importance of CPI:
It is used to escalate a given dollar value, over time, to preserve the purchasing power of
that value. Thus, the CPI is widely used to adjust contracted payments, such as wages,
rents, leases and child or spousal support allowances. Private and public pension
programs, personal income tax deductions and some government social payments are also
escalated using the CPI.
It is used as a deflator of various economic aggregates, either of income flows, to obtain
constant dollar estimates of income, or of expenditure flows, to obtain personal
expenditure estimates at constant prices.
It is used to set and monitor the implementation of economic policy.
Business analysts and economists use the CPI for economic analysis and research on
various issues, such as the causes and effects of inflation and understanding regional
disparities in price movements.