Suitability of G.M. for Construction of Index Numbers

G.M. or Geometric Mean is particularly suitable for the construction of index numbers due to the following reasons:

1. Reflects Proportional Changes: The G.M. reflects proportional changes and is not affected by the magnitude of the changes. This makes it suitable for constructing index numbers as it provides a more accurate representation of the changes in a series.

2. Less Sensitive to Extreme Values: Unlike arithmetic mean, the G.M. is less sensitive to extreme values in a series. This is because the G.M. involves multiplication rather than addition, which reduces the effect of extreme values on the overall value of the series.

3. Suitable for Logarithmic Series: The G.M. is also suitable for logarithmic series, which are commonly encountered in economic and financial data. This is because the G.M. of logarithmic values can be easily calculated as the arithmetic mean of the values.

4. Consistent with Theory of Consumer Behaviour: The use of G.M. in the construction of index numbers is consistent with the theory of consumer behaviour. This is because the G.M. is used to calculate average changes in prices, which is a key factor in determining consumer behaviour.

Overall, the G.M. is a robust and reliable measure of central tendency that is particularly suitable for the construction of index numbers. Its ability to reflect proportional changes, reduce the effect of extreme values, and handle logarithmic series makes it an ideal tool for analyzing economic and financial data.