Index Number - 3 Fixed Base Method - 1
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Selection of Base Year
We know that index number measures the relative change in a value of a variable as compared to some other period. The period with which the comparison is made is knows as base year. The base year must be a normal year, free from abnormal events like inflation, depression, war, flood, etc., otherwise the comparison many not be appropriate. Moreover, for an effective comparison base year should not be too far from the given period. The index number of base year is taken as 100. The base year can be selected in two ways: (i) Fixed Base Method (ii) Chain Base Method
Fixed Base Method
In this method one particular year or the average of certain past years may be considered as the base year or base period and index numbers of the other years are calculated with respect to the prices of the base year. The base year so fixed should be a normal year.
Thus, according to fixed base method
Index number = Price of current year X 100
Price of base year
If p0 is the price of the base year, p1 is the price of the current year and I the Index number then,
I = p1 X 100
p0
Merits:
i. As the value of fixed base remains constant, the uniformity is maintained for all years.
ii. This method is useful for long-term comparison.
iii. It is easy for understanding and calculation.
Demerits:
i. It is difficult to select a normal year.
ii. With changes in tastes, habits and customs of people new commodities are required to be introduced and some commodities are required to be removed which is not suitable in fixed base method.
iii. The weightage of different commodities are required to be reconsidered and this is not possible in this method.
iv. The results are not reliable if the base year is not selected properly.
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