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CA Foundation · Quantitative Aptitude · Index Numbers

Which statement correctly describes the effect of choosing an unsuitable base year for an index number?

An unsuitable base year distorts the index. The base period should be normal, so if it was a year of famine or boom, every later comparison is exaggerated or understated. Different base years do not give identical series, and the unit test is unrelated.

  1. AIt has no effect, because all base years give the same index series
  2. BIf the base year was abnormal, such as one of famine or boom, the index will give a distorted picture of changesCorrect
  3. CIt makes the index violate the unit test by changing the units of prices
  4. DIt makes the index always equal to 100 in later years

Explanation

The base year should be a normal year. If it is abnormal, for example prices unusually high or low, all later comparisons are distorted. Different base years do give different index values, and the unit test is about units of measurement, not the base year.

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