Difficulties in measuring changes in value of money

 (A) CONCEPTUAL DIFFICULTIES

(1) Vague concept of value of money:- The concept of Money is vague, abstract and cannot be clearly defined. The value of money is a relative concept which changes from person to person depending upon the type of goods on which the money is spent.

(2) Inaccurate measurement:- Price index number do not measure the changes in the Value of Money accurately and reliably. A rise or fall in the general level of prices as indicated by the price index number does not mean that the price of every commodity has risen or fallen to the same extent.

(3) Reflect general changes:- Price index number are averages and measure general changes in the Value of Money on the average. Therefore, they are not of much significance for the particular individuals who may be affected by the changes in the actual prices quite differently from that indicated by the index numbers.

(4) Limitations of wholesale price index:- the wholesale price index numbers, which are generally used to measure changes in the value of money, suffer from certain limitations. They do not reflect the changes in the cost of living , they ignore some of the important items concerning the urban population, they did not take into consideration the changes in the consumer preferences.

(B) PRACTICAL DIFFICULTIES

(1) Selection of base year:- While preparing the index number,first difficulty arises regarding the selection of base year. The base year should be a normal year. But it is very difficult to find out a fully normal year free from any unusual happening. There is every possibility that the selected base year may be an abnormal year or a distant year, or may be selected by an immature or biased person.

(2) Selection of items:- the selection of the representative commodities is the second difficulty in the construction of index numbers. With the passage of time the quality of product may change, if the quality of a product changes in the year of enquiry from what it was in the base year the product becomes irrelevant. The relative importance of certain commodities may change due to a change in the consumption pattern of the people in the course of time. For example ,vanaspati ghee was not an important item of consumption in India in the pre-war period but today it has become an item of necessity. Under such conditions it is not easy to select the appropriate commodities.

(3) Collection of prices:- It is also difficult to obtain correct, adequate and representative data regarding prices. It is not an easy job to select representative places from which the information about prices is to be collected and to select the experience and unbiased individuals who will supply price quotations. Moreover there is the problem of deciding which prices ,wholesale or retail ,are to be taken into consideration. 

(4) Assigning weights:- Another important difficulty, that arises in preparing the index numbers, is that of assigning proper weights to different items in order to arrive at correct and unbiased conclusions. As there are no hard and fast rules to give weight for the commodities according to their relative importance, there is very likelihood that the weights are decided arbitrarily on the basis of personal judgement and involve biasness.

(5) Selection of averages:- Another major problem is that which average to be employed to find out the price relative. There are many types of averages such as arithmetic average , geometric average, mean ,median ,mode etc. Use of different averages give different results. Therefore it is essential to select the method with great care.

(6) Problem of dynamic changes:- In the dynamic world, the consumption pattern of the individuals and the number and varieties of goods undergo continuous changes. They create difficulties for preparing index numbers and making temporal comparison.