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CA Foundation · Quantitative Aptitude · Index Numbers

Which of the following best describes the 'sampling error' limitation in constructing index numbers?

Sampling error arises because an index uses only a sample of commodities and price quotations rather than the whole population, so it may not exactly represent the true price movement. A poorly chosen or small sample leads to a biased or inaccurate index.

  1. AThe index is wrong because the base year is too far in the past
  2. BThe index cannot be converted from one base to another
  3. CSince only a sample of commodities and price quotations is used, the index may not exactly represent the whole population of pricesCorrect
  4. DThe index gives equal weight to all commodities by definition

Explanation

Index numbers are built from a selected sample of items and markets, not every commodity and price. A sample that is unrepresentative or too small causes the index to deviate from the true price movement. Base distance, base shifting and weighting are separate issues.

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