Construction of Index Number

Building a reliable index number is not just a computation — several judgement calls have to be made carefully first. The purpose of the index must be stated clearly and unambiguously, since a poorly defined purpose leads to a misleading index. The data sampled must be large and representative enough of the group being studied to make the index trustworthy. The base period — the reference point every later figure is compared against — needs to be a genuinely "normal" year, free from an unusual boom, depression, or catastrophe that would distort every future comparison; it should also be neither too short nor too long, since prices measured over a very short period tend to be unreliable. Finally, the choice of commodities included has to be a deliberate, judgement-based sample (not a random one) large enough to represent overall price movement, since pricing every single commodity in an economy is impractical. …