Limitations of Index numbers
The limitations of Index Numbers are as follows:
1. Provides Relative Changes only:
Index Numbers estimate relative changes only and cannot speak the truth as they are only approximate indicators. Besides, they represent the generalized truth based on the overall average of the items. Therefore, it does not apply to specific units.
2. Lack of Perfect Accuracy:
Index numbers do not consider every item and are based on the sample items. Thus, in case of an inadequate sample or a sample selected through a faulty process, there will be inaccurate results.
3. Ignores Qualitative Changes:
Index numbers do not pay any attention to the qualitative changes in the product while constructing the price or production. An increase in the price possibly results from the improvement in the quality of the product. But it is neglected in the index numbers.
4. Possibility of Manipulations:
Index numbers can be created in a way that allows for manipulation. This manipulation can be made in a selection of a particular base year, a particular group of commodities, a specific set of prices, etc.
5. Difference between purpose and method of Construction:
When the index numbers are created for a specific purpose using a specific methodology, they are not suitable for all situations and uses. If they are employed for other reasons, they are bound to produce incorrect conclusions.
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