Q.State with reason whether you agree or disagree with the following statement:
Index numbers are free from limitations.

Disagree — index numbers have several limitations: they are approximations, sample-based, sensitive to the base year and to weights chosen, unable to account for quality changes, and open to misuse; hence they are not free from limitations.

Reasons (limitations of index numbers)

1. They are only approximations — an index number is an average of relative changes, not an exact measurement, so it gives only a broad, approximate picture.

2. Based on samples — since all commodities cannot be included, a representative sample is selected; a poorly chosen sample makes the index unrepresentative.

3. Choice of base year — results depend heavily on the base year selected; an abnormal base year (war, famine, boom) distorts the index.

4. Problem of weights — assigning weights to commodities involves judgement; wrong weights give misleading results.

5. Quality changes ignored — index numbers compare prices but cannot easily account for improvements or deterioration in the quality of goods over time.

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