Chapter Two OF INDIA METHODOLOGY OF CONSTRUCT ION OF INDEX NUMBERS OF UNIT VALUES OF EXPORTS AND IMPORTS

Transcription

1 Chapter Two METHODOLOGY OF CONSTRUCT ION OF INDEX NUMBERS OF UNIT VALUES OF EXPORTS AND IMPORTS OF INDIA Index nnmbers express the relative changes in a ve.rialble compared with a particular base. The computation of index numbers involves many problems, of which the following three are ver,y importanta ( 1) The choice of data; ( 2) The choice of an average which involves the choice of weights; ( 3) The choice of the base year. The Choice of Datm.s Although there are no fixed rtlles as regards the choice of data, if one has various sources, the choice of reliance for foreign trade data, generally, has to be made from the government publication. This is because no

2 private organization can collect this data. Only the government of the country has the power, the resources and the financial ability to put them together. (1) In India, there is only one organization of the Government, the Department of Commercial Intelligence and Statistics, Calcutta. Its main function is making records of the commodities that pass through customs offices. Recently, however, the Department of Foreign Exchanges of the Reserve Bank of India has also started collecting data from the point of view of balance of payments. India's trade statistics are not, however, complete. ' This limitation of statistical data of India arises from various factors. First, the movement in gold and silver were under treasure which includes monetary and non-monetary movements of these metals. Thus part of the non-monetary gold and silver movement which should strictly come under merchandise trade is outside its scope. Secondly, like all the other countries foreign embassies in India have rights which give them sanction to import goods from their countries without passing them through the customs offices. Third, - and more important - the trade carried by the government of the country is not adequately included in our statistics. Up to the year ,j (1) See in connection with the general discussion of the problems arising f'rom the choice of' data, A. Maizels, coverage, a R. G. D. Allen and J E. Ely, eds., International Trad,e. tatistics (New York, )

3 26 imports and exports ot Government Stores were dealt with separately, bllt later sllch exports and imports were 1nolttded in the general foreign trade statistics. The fact that the data regarding govemment imports and exports is made available after lapse ot some time, makes the constrllction of index numbers of' unit vallles of imports and exports tor a particttlar year difficult and partial. Efforts have been made 1n the direction of making available sllch data immediately, yet one cannot be sure that they include the movement of' all sllch imports and exports. Moreover, lack of inadequate quantity data as regards imports also makes data incomplete and constrllction of' unit value index numbers difficult. Another important problem which concerns the use of Indian trade statistics is that their territorial coverage compiled by the DGCI&S has altered over the period. Till t ra.de statistics are available for India and Barma j o1ntly, while from 1937 onwards we have these statistics available separately for India. Up to 1947, trade statistics of India ref.erred only to British India. With the partition of India in 1947, a part of the country, namely, Pakistan, became a sovereign entity. It excluded the trade of ports of Indian states like Kutch and Cochin from the general totals. But 1n the 87th and 88th (combined) issttes of JYlnttal Statement; of trade of India of the DGCI&S have included the trade of these ports along with the general trade statistics.

4 27 lp rthe valuation of exports and imports of India was made on the basis of their whole-sale market value less trade discount and duties. (2) For imports this resulted 1n valuation on an approximate c.i.f. ( inclu.ding cost, insurance and freights) basis whereas exports mere.valued approximately f.o.b. (free of board). With effect from April 1951, however, the basis of export valuation has been changed to confor.m strictly to r.o.b. c basis inclusive of export duty and for ~ess leviable. ( 3) Selection of Fo~ulaa There are three main fo~ulae to compute volume and price or unit value index numbers named after the respective authors. The following fonnulae are the price (unit value) index numbers for.mulae: (4) (2) See for detailed analysis of the problems of valuation in international trade J. E. Ely and N. M. Petruzzelli,: "Valuation," 1n Ibid., ( 3) These facts are based entirely on the information collected from the publications of DGCI&S. "According to the provisions of the Indian Sea Customs Act, VIII of 1878 (Section 30),' the values of. goods imported or exported. are based on wholesale market prices, and represent - (a) The 'Wholesale cash price,- less trade discount, for which goods of the like k:1nd and quality are sold, or are capable of being sold, at the time and place of importation and exportation, as the case may be,- without.any abatement or deduction whatever, except ( 1n the case of goods imported) of the amount of duties payable on the importation thereof, or (b) where such price is not ascertainable, the cost at which goods of the like kind and quality could be delivered at sueh place without any abatement or deduction except as aforesaid." Government of India DGCI&S, Annual Statement of t~e l:~rf1f~air~: of ls~~f~it Fo 1 r 1 ithe Five. Fiscal Years ending Marc 4 en a,,., ( 4) R. G. D. Allan, Statistics for Economists (London, 1949)

5 28 Paasche Formula Pl - 'LP12f Z.PiQ Laspeyres Formula Pl - I 2PlQ.o fpoqg Fisher s Formula Pl ~ h:.pnqo x Z..PnQ! I a>oqo X ~NQn Pl - Price of the current year Po - Price of the base yea:r Qo - Quantity of the base year Ql - Quantity of the current year Before selecting the formula to be used it is necessary. to have some idea about the average to be used. There are three main types of averages which are used in the construction of index numbers. In the simple arithmetic mean all the commodities receive equal consideration. This average has the defect of giving equal place in the construction of index numbers to all commodities having varying importance. result 1n some minor commodities assuming an undeserved importance in the measurement of price movement. This may The weighted arithmetic average is an improvement over the simple arithmetic mean because it facilitates the allocation of weights to the commodities according to their importance in the trade aggregate. But the selection of weights may be arbitrary depending upon the puj:pose that -et the constructor has in his view~ Geometric mean ( Fisher. s) satisfies what is called the time reversibility

6 test. (5) But there are enormous computational difficulties in employing~ this average when a mass of data has to be used in the construction of price index numbers. As the practical difficulties in the computations are too many, the geometric mean is not considered in construction of new index numbers. Weighted arithmetic mean is used in the Paasche and Laspeyres formu.lae. Paasche index is the cu.rrent year weight index and Laspeyres is the base year weight index. The fixed base index with the base year weights has the advantage of reflecting only changes in price. Since the quantities of trade used as weights remain unchanged, no influence of changes in the composition of trade is inter-mixed with the price change. The difficulty, however, is that with the passage of time the quantities of trade will be changing, index numbers, based on Laspeyres formnla, will not reflect the changes 1n trade actually taking place. A current weight index has the advantage of permitting comparison of the manner in which the prices. of the traded commodities in the current year have developed over the period under consideration. The results yielded by these two fo~ulae may, however, be different if the structure of trade undergoes fundamental changes. ( 6) (5) "From the technical statistical point of"view, it is desirable that the index number should have the same reversible property as each of the separate price relatives, i.e., that the index calculated forwards and the index calculated backwards on the same formula and between the same two dates, should be reciprocal of each of other." Ibid., 104. ( 6) c. P. Kindleberger, Terms of Trade a A European Case Stqd.Y (New York,' 1956) 319.

7 30 " Q I Purely on the basis of,(priori reasoning there is no standard to measure inherent advantages and shortcomings of the Laspeyres and Paasche formulaeo The Laspeyres and Pa.asche formulae are equally good because each uses data from period 0 and 1 for the single comparison of these periodso Further,' each one of them uses only part of the weight data related to two sets of priceso Thus, the Laspeyres formula, which uses base year weights does not have any superiority over the Paasche fonnula which uses the current year weights. Both suffer from one disadvantage that they do not use both the weights which would present a more accurate picture of' the situation than mere use of' current or base year weightso The Laspeyres and Paasche formulae over-estimate and under-estimate the changes respectivelyo The Laspeyres formula assumes that the quantity of commodities traded or purchased in the current year will be the same as that of the base year whereas the Paasche formula assumes that the qnantities traded in the base year will be the same as the quantities traded 1n the current yearo Any change in the value of commodities traded must, therefore, be due to changes in priceso This assumption is, however, not very true since change in price will certainly effect some changes 1n quantitieso A consumer, for example, will change his consumption pattern whenever there is ' a very heavy rise in priceso The Laspeyres f'onnula which takes into account only the prices changes of those commodities which

8 . 31 are traded in the base year, t,_likely to over-estimate, thus, the price increases to the consumer. A similar argument could be extended to Paasche formula also. The actual expenditure 1n the given year (LPlQl) shows that the sum of' money (CU'oQl) could have made possible the purchase of the set of' quantities ~ 1n the base period. The Paasche formula measures the price change in this situation. But, 1 again, 1n a free market when there is a price change, there will be changes in quantities also. Since the base aggregate (yoql measures not only price changes but also partly quantity changes, Paa.sche formula is likely to under-estimate the price changes. ( 7) This over-estimation and under-estimation of prices in these two formulae depend upon the source of' the change 1n prices. If this change is due to increase 1n demand, it may be expected that the commodities which rise the most 1n price will increase most in consumption. Under these circumstances, the Pa.asche index will show a greater rise than Laspeyres. If',' on the other hand, the change emanates from the side of sllpply, the Laspeyres index will outstrip the Paasche index in a period of rise in prices since commodities which rise most in price will also decline most in consumption. (8) The Laspeyres and Paasehe index numbers either over-estimate or under-estimate the price changes only with reference to the base year. (7) Bruce D. Mudget~l index Numbers (New York, 1958) <a), A 2DJ.tq~ ~:?Lt-7(,:-;A: :'\.,,, j 'J :1 I " ~<) '~v.

9 52 The difficulty about the choice of fonnttla arises when the result of these fonnulae diverge significantly. If there is a difference say of only 2 points, one can safely accept any fom.ula because both are equally good. In cases where the difference is very significant, it is difficult for the student to make a choice. If in a particular situation when Laspeyres Index (L) :- 100 and Paa.sche Index (P) ~Index of difference between the two} (D) ~ 100 doubt will be cast on the measurements. In such a situation, a compromise between (L) and (P) is suggested. The reason for suggesting this compromise lies 1n the partial character of their coverage. If one compensates for the deficiency of the other,- some sort of an average could meet the requirements. (9) (a) Arithmetic crossl i (L - P) - i (1:~~Qo + ~PlQJ.).. ~ '. (~ eqo tioql) (b) Geometric crossl I L.P 1 ~ 111 '/!P1Q2 ~ :LflQ;l. '. I, I Z:.PoQo Z-PoQl In such compromise formulae the arithmetic cross is easier to compute than the geometric cross, and hence some authorities ( 10) prefer the formula. Convenience, though not a virtue in itself, is an important recommendation for any formula 1n view of the prevalence of massivity of the data to be used. But as all compromises cannot but partake some of the (9) c. Me Walsh, "Index Numbers," Encyclopaedia of th,e Social Sciences (New York, 1949) VII-VIII, 657. See also his book, The Problem of Estimation (London,. 1921). ( 10)Mudgett Index Nnmbers, 52.

10 33 defects of the original formulae, these crosses based on compromise are not free from the defects 1n either for;mulaeo On account of this shortcoming, the crosses of these formulae f1;:a_ have not been considered for the purposes of ~present study. Unit Value Vso Pricess Apart from selecting a fol'dlula, another ilnportant question that arises is whether to take unit value or price of commodities into consideration while constructing index numberso This problem is more complicated 1n foreign trade than in domestic trade because it is very difficult to get quoted price for internationally traded commoditieso The major difference bat\ieen index numbers based on prices and the unit values arises from the degree of their inaccuracy, coverage and t1m1ngo Index numbers based on price quotations may be regarded as more accurate reflections of changes 1n price and hance are better to a certain extent than those using value. Unit value is derived by dividing the value reported 1n the trade statistics by the reported quantity. It the commodity class is less than completely homogeneous," changes 1n unit vellle may reflect the changes in the commodity composition of the group as well as 1n priceo Price data may be distorted by changes 1n the character of the goods priced, particularly 1n the manufactured goods where quality has tended on balance to improve over timeo this objection applies equally to commodity classes reported in trade returns. Generally, however, price data refer to classes Bll.t

11 34 of greater homogeneity then do unit valueso they are more accurate than the lattero To this extent However, there are several considerations operating in favour of tmit values as wello The main interest in the study of a count17, 1 s tenns of trade is centered on the changes - 1n prices at which goods are bought from and sold to the foreignerso Wholesale prices in the market in the interior may differ from prices actually paid or received from abroad on account of taxes, subsidies, price discrimination and transport charges which the former will have to contend w1 tho comparing import unit values with the prices of domestic goods, it is necessary to add tarif'fsj if internal price has to be compared with the price paid to foreigners it should be subtractedo Likewise export unit values are a more accurate measure of prices received from foreigners than for the sale prices of internal trade when significant transport charges are incurred in moving the commodity from internal market to the port of exportso There may be a difference between unit values and prices if there is a difference in timing between price quotation and unit values based on the time lag between placing of the contract and the shipments in foreign tradeo However, Wlder normal circumstances, there will not be much difference between the twoo ( ll) In (11) Kindleberger, Terms of Trade, 317o

12 35 ' For the construction of the new series of index numbers unit values have been choseno Firstly, beca11se of the advantages stated above, and secondly, because 1n the case of the present study, it is very difficult to get a world price for all the commodities traded by Indiao Selection of 3 B. e Year One of the major difficulties in the construction of fixed base index numbers is the selection of a base yearo problem becomes still more difficult when index numbers are to be constructed with fixed base weights. yearo The Theoretically speaking,. the base year must be a normal The word.'normal.' came to be used in the literature on - ~ index numbers becallse the development of their theory rollghly parallels the development of modern business cycle theory, and the bllsiness cycle students had of necessity, to select, a 'normal' part of time to measure movement towards prosperity - or depression. This compelled some writers on index numbers to stress the importance of selection of a normal base year 1n the construction of index numberso subject is a case in pointo Mitchell.' s study ( 12) on the Although it will be ideal to have a.'normal.' year, 1 t is impossible to choose oneo The word.'normcl.'::: 1; very ambiguouso p A year may be 'normal,' from the point of view of,. one consideration while from another 1t may be abnormalo ~ ( 12) Wo Co Mitchell,' The Making. and Usingfclndex Numbers ( tlashington,, 1921) o Ag'Sin,'

13 36 the same year can be treated as normal by one pel"son and abnormal by another, even though their purposes may be identical. The lack of a proper definition of the word 'normal.', and inability to attain it in actuality necessitate the abandonment of the usage of this word 'normal.' in its rigid sense. Hence, 1n the selection of the base year for the construction of index numbers in this study, no effort has been made to detennine its normalcy. Three other criteria have been taken into account 1n the selection of a base year. They are: (1) The year must be tree from strong economic and other fluctuations. (2) The year must not be remote from the period under consideration. (3) The year must be comparable with the base years of the existing series. The period under study has been divided as followss , and This division is not entirely arbitrary, but is based on the occurrence of some economic upheaval or some other important econotnic and non-economic factors which have influenced the terms of trade. Thus, the period from was a period when the world experienced one of the greatest depressions know.n to history. Consequently, many measures like restrictive commercial policies and exchange restriction were introduced which considerably affected the world trade and the trade of Indiao The period from witnessed the Second World War and inherited its legacies. The period from was the post-war period which had to contend with the

14 37 problems like adjustment, inflation, heavy balance of payments deticitso It also witnessed the beginning of planningo If' a study is made of the structure of foreign trade in these periods,~ a :f'ew important changes can be noticedo Table Noo1 Percentage of the three main classes in total value of imports and exports of India ~------~-~~~--~-~~---~ M Item ~-~ ~ ~-~ Class I Food, Drink and Tobacco 14o8 15o8 24o3 20o7 26o4 Class II Raw J4e.terials 10o2 2lo8 'l1jo7 Z3o7 :!los Class III Manufactured articles 70o5 60o9 44o3 48o8 44ol ~ Total or the above 95o5 98o5 99o3 99o2 98o ~ Rest 4o5 1o5 Oo7 Oo8 1o7 Class I Food Drink Tobacco 25o0 24o0 2lo0 24o5 24o1 Class II Raw.Materials 45o4 45o0 23o5 22o0 27o2 Class III Manufactured goods 26o7 29o3 55o1 53o0 48o Total or the above 97ol 98o3 99o6 99o5 99o9 Rest 2o9 lo7 Oo4 Oo5 Ool Sources Reserve Bank or India., Retorts on Currenc;t ansi Finance, Bombay) and statistics published by the DGCI&So

15 '38 It is clear from the above tables that there were structural changes 1n India~s foreign trade in forties, and 1n early fiftieso The period from to seems to have w1 tnessed minor changes in the share of commodity groups in t'otal tradeo But during the succeeding years changes were well markedo The exports of manufactured goods increased from 26~7 per cent in to 53o0 per cent in and 48o6 per cent in o Imports of raw materials increased from 10o2 per cent in to 27 o7 per cent in 1949-EOo The share of manufactured goods in imports was reduced from 70o5 per cent in to 48o8 per cent in and 44ol per cent 1n o Period, The base ye~ chosen for DGCI&S series for this period is 1927-Bo The same year has been selected for the construction of new index numberso This year seems to be a fairly undisturbed yearo The forces that were responsible for bringing about world-wide depression 1n 1929 were at work since 1925o BUt this year ( ) did not show any significant nuctuationo ( 13) (f>uvses ( 13) League of Nations, Ggn&Pess and Ph :ses of the World Economic Depression (Geneva, 19 31) passim; Review of the World Trade 1930 (Geneva, 1932) passimo

16 39 The years prior to 1925 could not be chosen because they were not free from disturbances, since the recovery programme after tlorld War I and postwar (World War I) continued during those years. ( 14) These years suffer from two additional disadvantages compared to the year First, they are not comparable with the base year of existing index numbers, and secondly, they are remote from the period under consideration. The year which was the depression year, obviously, was not considered. ( 15) has been chosen as the base year. Period, In view of all these factors the year For the period ,' the year has been selected as the base year, though during this year as well as in , economies of the world were experienced ana 'lle emergence of armament boom which followed the recession in 1937-s. The years between were not considered because they were depression years was the year of' rece~sion which affected India's foreign trade and was also the year of' - - separation of Burma from India. ( 16) ( 14) League of Nations, Courses and Phases of' the Depression, passim. ( 15) Government of India, Report of the Controller of the curren9}'" (Calcutta, 1928) passim; Report of the Controller of the Currency (Calcutta, 1929 passim. ( 16) Reserve Bank of India, Reports on Currency and Finance and (Bombay). passim.

17 40 Period, The period after 1945 presents certain difficulties. The effects of war on the economy continued in the postwar period. As the table on the share of commodity groups on India.' s exports and imports indicate, there were certain.. changes in the structure of trade particularly a1"ter the country's partition. The partition was an important event in the history of the country. It brought in its wake many political and economic disturbances. Economically, and especially from the standpoint of foreign trade, the separation of a substantial territory, which was a major supplier of raw materials like raw cotton end raw jute, forced India to import the very same raw materials in Which she was an exporter. (17) Though during this year efforts were being made by all countries to return to normal conditions, it was one of the most abno~al years for India. During this year the country incurred a heavy balance of payments deficits which led to the devaluation of rtlpee in September In spite of all these disturbing factors, however, its selection of the base by the DGCI&S could be explained by the fact that it was the first post-partition year. Same factor led to the selection of this year as the base of new series. (18) ( 17) V G. Pandha.rkar and V N. Murti, "Changes 1n the pattern of India's exports," Reserve Bank of India BUlletin, 3 (September 1949) ( 18) Although DGCI&S and Reserve Bank of India changed their base year for the price and volume index nlllllbers of exports and imports of India in tram to , it was thought not necessary for the present analysis to change the base year.

18 41 The selection or a particular year for the purposes of study involves the danger or getting an unrepresentative pictureo.an individual year is unrepresentative in the sense that it reflects the impact of disturbances of random events, and divergent short-run forceso is taken this danger may be mil.nimizedo usefulo If an average of some years But this is not very "For the base, there is a choice between one particular year and a group of yearso For example, Switzerland selects 1938 as the base of the volume index but the average of as the base of the price 1ndexo There is usually little to choose.between the two methodso There is possibly some advantage in taking an average of years as the base of price index, since the weights 1nvol ve the base quanti ties imported or exported and these may vary somewhat erratically from one year to another, with greater stability over a run of yearso"( 19) A little advantage that may be derived from the average of some years as base is not really worth considering 1n the face of computational difficultieso So, a single base year has been preferred to the average of years in the construction of new i...tu.,t 'l1u T>'l l,r-en-5. :f:ndieeeo ( 20) ( 19) Allen, "Index Numbers of Volume and Price, a in Allen and Ely, edso, International Trade Statistics,: 202o ( 20) Chain base has not been considered because the index numbers on chain base will not serve well the present analytical purposeo

19 42 Coverage: If a few commodities enter trade it is possible to take all of them into consideration. But when a host of commodities figure in the trade, it becomes very difficult to take them all into calculation. Another difficulty that arises is that many commodities are not recorded quantitatively. Therefore, it is not possible to include them in the computation of index numbers of prices which involve cross valuation of quantities of one period at prices of another. Hence, an adjustment has to be made 1n the seiection of commodities. For this certain assumptions have to be madeo It is assumed that prices of commodities which are not included in the calculation, either due to lack of quantity data or due to an insignificant value, will move along with the prices of the classes of commodities to which they belong, and to the general group,' in which they are included. In the computation of the new series, the selection of commodities is governed by the principle that the minimum value of the commodity to be selected should be RsolO lakhs and above. ( 21) The coverage in all classes except in Class III in (21) In connection with the quantum index number, it has been considered at some length in a technical paper issued by the Statistical Office of the United Nations. Statistical Commission at its Fourth Session considered the question of coverage of quantum index number in international tradeo The Commission considered such index numbers were generally base as only a limited number of items of trade, it would be desirable for national compilers of those numbers to undertake when necessary adjustment required to make the calculated index numbers reflect more closely changes in total trade. The assumption to be made are the items of' trade which not directly used 1n the calculation of quantum ( 1) The same price changes as other items ( con teo on next page)

20 43 imports has exceeded 60 per cent. In the case of exports the coverage fs very high. In some classes of exports the coverage has been as high as 95 per cent. The coverage 1n imports, on the other hand, has varied from class to class resulting 1n low coverage 1n general. The coverage in Class I and Class II of imports is considerably high. It is nearly 90 per cent in both the classes. Only Class III of imports - the most important class suffers from low coverage. The low coverage of 39 to 50 per cent 1n Class III is due to lack of l~u~.., recorded quantity data. L ±he- coverage of exports is proportionately larger then that of imports. This is becao.se India being essentially a raw material producing and exporting aountr.y, exports consists of a small numbers of commodities. Also exports of manufactured commodities consists mainly of textiles, data on Which are easier for collection than on various other manufactured commodities. (22) The classification of the commodity group in the construction of index numbers is based on the classification in the trade aggregate. (2) The same price changes on all other items 1n the related commodity. ( 3) The same quantum changes as some on all of the other items of trade aggregate. ( 4) Such variations that no adjustment is attempted and the quantum index numbers is applicable only to that part of total imports or exports directly used in the computation. - United Nations, Statistical Papers, Series M,, No.3 (New York, 1949). ( 22) The coverage of imports varies between 55 per cent tor Finland, 68 per cent for Sweden, 72 per cent for Canada, 75 per cent tor the United States, 94 per cent for Italy and 95 per cent tor the United Kingdom. Allen, Index Numbers," in Allen and Ely, eds., International Trade Statistic, 201.

21 adopted in DGCI&S datao The classification or articles is tmder the following five headsa ( 1) Food,: Drink and Tobaecoo (2) Raw materials and produce and articles mainly tmm.anufacturedo (3) Articles wholly or mainly manufacturedo ( 4) Living animal so ( 5) (e) Postal articles not specified under imports (b) Postal articles under exportso The percentage share of the living animals and postal articles in India's trade is negligible and also there are no quantity data f'or postal articleso Hence group index numbers f'or these classes have not been constructedo In the course of discussion on methodology f'or construction of the new series of' index numbers, some problems about the accuracy of the index numbers were raised in the texto A resume of shortcomings and difficulties of index numbers is made in the following pageso The greatest defect of index numbers consists 1n their inability to register any changes 1n quality of commodities over per1odo This affects the use value of index numbers particularly 1n a long period analysiso Although the present analysis is not intended to make any systematic study of longperiod movement of terms of trade, this danger of the inability of index numbers to register quality still exists becau.se of the possible changes 1n the quality of imported commodities even over the period ttnder considerationo

22 45 The data used in the construction of index numbers is equally important to decide their reliability..as already seen, the quantity data for many commodities are not recorded in India. This affects the coverage and consequently the. accuracy of index nttmberso At places there are differences in the publication of data from year to yearo are negligible~'' Though these they are yet a factor to be reckoned witho The very nature of collection of data may affect the accuracy. onl.. The trade statistics published by DGCI&S tak~e commodities which pass through customs, but many commodities,: as a11 eady described, may escape the latter. During 1949, 1950 and 1951, a lot of food imports did not pass through cllstomso In such a situation, the trade statistics published by the customs will not reflect the real positiono This inadequacy of coverage, owing to the lack of data, affects the totality of data, taken into consideration, and thereby the unit value of ~"tl\.be.,.-.s indexes;._ constructed. But this limitation cannot be eradicated until the method of collection of the foreign trade statistics of India is improved. The valuation of quantities traded on different measures such as fooobo for export and Coiofo for imports poses the difficulty of a strict comparability of data. In India there is an additional discrepancy in trade statistics in which the valuation up to 1951 was made on the basis of market price, but was made from that year ont'lards on a basis which could m~e exports strictly comparable to fooobo Though

23 46 these difficulties are to be taken into consideration 1n the assessment of the utility and reliability of index numbers, it will be useful not to overstress their importance. The unit values of mere broad commodity groups without proper subdivisions also distort the price factor. For example, 1n the group, cotton textiles will be divided into major subgroups - yarn, piecegoods_.~ hosiery, and many other _commoditieso This groupings will certainly make these commodities as distinct groups of individual commodities. Lumping them under one heading- I-t, however, becomes inevitable 1n view of the vastness of the datao The selection of a particular base year is subject to many qualifications. These qualifications 1n the case of the base years, chosen for the construction of index numbers of prices of exports and imports of India, have already been discussed. The fact that these years are not ideal years to serve as the base makes the index numbers constructed on their base subject to these limitationso An ideal base year is the 'normal.' year where all the forces are.'normal,' and results are also.'normal 1 o If it is difficult to define a normal year, it is much more difficult to find one in reality. However, there will be an 1mplici t assumption that the years chosen as base are free from disturbances. This assumption may not hold true in the case of a real situation. As a result the base years chosen tor the study may not be free from disturbanceso But they were years which, compared to other years, were relatively stableo

24 47 Linking of the Series Any series of index numbers, based on a single base year, is unable to give a realistic picture of the situation because of the ever changing pattern of data, a1 though over a short period it can be assumed that changes may not be substantialo This assumption is, however, not tenable when a long period of years is under studyo In spite of these difficulties, the need to get a long run picture of a particular variable has been felt and hence, a linking of the series, based on different base years, has been adoptedo Linking of series would not be feasible, when the coverage is different, and is in different series and there is a great discrepancy in the data collected through themo It is ideal when the series are identical both 1n methodology and collection of datao It is, however, be impossible for such an ideal situation to existo Roughly, for practical purposes the series should not differ widely in methodology and coverageo A series can be shifted to a new base by multiplying each of its index numbers for the period selected for the new baseo That is Xo 1 100/100. Since each of the index numbers is multiplied b! the constant factor, the relative fluctuations in the series remain unchangedo ( 23) (23) A. Spurr, So Lester Kellogf and others, Business and Economic Statistics (Hol}\ewood, lllo,\ 1956) 320o.

25 48 The series constructed here ( Paasche Series) have been linked on the above principleo The purpose of linking is to see the long-term trend of terms of trade of Indiao This is subject to limi tationso Hence much reliance cannot be placed on these serieso In computing the index numbers for the period to with as the base, the data included the trade of Burma and Pakistan, while that of Kutch, Travancore, Saurashtra and Okha was excludedo But the separation of Burma from India in September 1937, and partition of the country in 1947, required changes in the collection of datao There is no attempt made to make the requisite changes in the data for the previous period for the Indian Uniono These series, in spite of similarity of the methodology,1 will be subject to limitation of unevenness and to a certain extent, incomparability of data chosen for the construction of index nttmberso (24) ( 24) In the succeeding chapters the tini t value has been.. ~dentified with the priceo Therefore the movement in the(v'alue index numbers have been treated as the movement in the price index nttmberso It should be noted that there is difference, however, between the unit value and price of a commodityo