How The Index Numbers Are Constructed?

The construction of index number is quite a complicated process. The main steps required for its technical construction are purpose of index number, selection of commodities, selection of markets, price quotation, and choice of base period, selection of averages and choice of weight. The most important element which affects all other factors while constructing the index number is the fixation of object of index number. Of we do not have any purpose in mind, the selection of commodities, selection of markets and selection of base period is merely useless.

The second is selection of commodities depends upon the object of index number. If the purpose of index number is to know the general tendency of price level then a large number of commodities will be selected and each commodity must represent one class of it. For the construction of an index number, it is necessary to include only those commodities which are most commonly used by the class of people for whom the index number is to be constructed. For instance if the cost of living index number for the labor is to be prepared then the number of selected commodities should be really representative of the labor group only.

Its construction is a quite difficult process.
Purpose of index number:
The most important element which affects all the other factors while constructing the index number is the fixation f object of index number. If we do not have the purpose in mind, the selection of commodities, selection of market and selection of base period is merely useless.

Selection of commodities:
Selection of commodities depends upon the object of index number. If the purpose of index number is to know the general tendency of price level, then a large number of commodities will be selected and each commodity must represent one class of it. For the construction of an index number, it is necessary to include only those commodities which are most commonly to be constructed.

Selection of market:
Selection of markets also plays a very important role in the construction of index number. If we are to prepare the cost of living index number of middle class people, we will have to select those markets where this group of people generally goes for shopping. For measuring of price level of agricultural commodities, the market for the chosen commodity is to be selected only.
Choice of base period:
In the calculation of an index number of prices, a certain years are to be taken as base period.