Explain the various tests of adequacy of Index Number.
4 years ago
Business Statistics
.: Following tests are applied for choosing an appropriate formula -
- Time Reversal Test : Time reversal test is a test to determine whether a given method will work both ways in time, forward and back ward. This test means that if the index number of the current year is computed on the basis of base year (P01) and again the index number of the base year is calculated on the basis of current year (P10), both the index numbers should be reciprocal of each other i.e. product of both of them should be
Symbolically, the following relation should be satisfied -
P01 X P10 = 1
- Factor Reversal Test : According to this test, an index of price, if multiplied by an index of quantity, with the same base, given years and commodities, should be equal to the true value ratio, i.e. equal to the ratio of current year price to total price of the base
P01 XQ01 = ΣP1q1
ΣP0q0
If the product is not equal to the value ratio, there is, with reference to this test, an error in one or both of the index numbers.
- Circular Test : This test is just an extension of the time reversal test. The test requires that if an index is constructed for the year ‗a‘ on base year ‗b‘ and for the year ‘b‘ on base year ‗c‘, we ought to get
the same result as if we calculated directly an index for ‗a‘ on a base year ‗c‘ without going through ‗b‘ as an intermediary. So, if there are three indices P01, P12 and P20, the circular test will be satisfied if :
P01 X P12 X P20 = 1
Surya Bikram Bhandari
Nov 14, 2021