Question

State with reasons whether you agree or disagree with the following statements:

Any year can be taken as a base year for index number.

Answer 1

No, I do not agree with this statement.

• In preparing index number the first step is c to select a year which serves as a reference)period.
• The prices in any other year are compared to the prices in the base year.
• The base year should be a recent year.
• If the base year is in the distant past, the result will not be meaningful. E.g. if the index number of the cost of living is calculated for the current year and compared with adistant past of 1970 as a base year it will not be meaningful.
• Base year should also be a year when the prices are regarded as normal prices.

Hence, any year cannot be taken as a base year for index number.