Illustration 2:
Page 10 of 16

LS 05 STA 101 (FALL 2016)
I M SHAFIQUL KALAM (ISK)
Assistant Professor, MNS, BRACU
a.
Arithmetic mean
b.
Geometric mean
Solution:
Page 11 of 16

LS 05 STA 101 (FALL 2016)
I M SHAFIQUL KALAM (ISK)
Assistant Professor, MNS, BRACU
This means that as compared to 2007, in 2008 there is a net increase in
price of commodities included in the index to the extent of 4.57%.
Note:
Although arithmetic mean and geometric mean have both been used, the arithmetic mean is often preferred
because it is easier to compute and much better known.
Merits and limitations of the methods:
This method has the following two advantages over the previous method:
a.
Extreme items do not influence the index. Equal importance is given to all the items.
b.
The index is not influenced by the units in which prices are quoted or by absolute level of individual
prices. Relatives are pure numbers and are, therefore, independent of the original units. Consequently,
index numbers computed by the relative method would be the same regardless of the way in which prices
are quoted
Despite these merits this method is not very satisfactory because of the following reasons:
a.
Difficulty is faced with regards to the selection of the appropriate average. The use of arithmetic mean is
considered as questionable sometimes because it has an upward bias. The use of geometric mean involves
difficulties of computations. Other averages are almost never used while constructing index numbers.
b.
The relatives are assumed to have equal importance. This is again a kind of concealed weighting system
that is highly objectionable since economically some relatives are more important than others.