Limitations of Index Numbers.There is no doubt that index numbers are very useful for the purpose for which they are computed, but they suffer from following limitations:
5 Limitations of Index Numbers
- Approximate Result:
Index numbers are not 100% correct. They give only the approximate result. We therefore cannot see the true picture of the general level of prices.
- Conceivable Goods:
As it is not possible to include all conceivable types of goods, so the result will obviously be false while computing the price index number.
- Comparison Difficulty:
Internationa1 comparison of the general level of prices is not an easy task. While co nputing the international price index number, the base period, the quality and quantity of the commodity should be the same.
- Determinants of Weights:
It is very difficult to devise appropriate weights to the articles of consumption. The determination of weight according to importance is purely subjective. – So there is limit in assigning the weights to different commodities at different places.
- Particular Purpose:
Index numbers only measure the change in sectional price levels. Therefore an index number prepared for a particular purpose may not be useful for another purpose.