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CA Foundation · Quantitative Aptitude · Index Numbers

Which of the following is a recognised limitation of index numbers when used to compare the cost of living of people in two different countries?

Comparing cost of living across countries with index numbers is unreliable because items, consumption habits and weights differ between countries. A basket that suits one country does not represent another, so the comparison can mislead. The other statements are factually incorrect.

  1. AIndex numbers can never be expressed as percentages
  2. BItems, consumption habits and weights differ between countries, so the comparison may not be reliableCorrect
  3. CIndex numbers cannot be calculated if the base year is a recent year
  4. DIndex numbers always give more weight to cheaper commodities

Explanation

Index numbers are built from a basket and weights suited to a particular place and time. Consumption patterns, tastes and available items differ across countries, so a common index gives a misleading comparison. The other options state things that are not true of index numbers.

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