The merits and limitations of chain base method are as follows:

Merits:

• In this method the problem of selecting the base year does not arise.
• In this method at any given time the preceeding year is taken as the base year.
• As the comparison is being done with the preceeding year, new item can be included according to taste and choice of the consumers and it is possible to remove the items not in use,
• As the value of the variable in the current period is compared with the period in the recent past, this method is useful in the fields of economics, trade and commerce.
• The index number of production and sales obtained by this method are mainly free from seasonal and cyclical fluctuations.
• Short term changes in the prices and production of the commodities can be compared by the index number obtained by this method.

Limitations :

• This method is not very convenient for long term comparison.
• If there is an error in the calculation of index number by this method then the effect of that error continues in the interpretation of the index number of the succeeding year.
• There is no uniformity in the comparison of the index numbers obtained by this method.
• If the information for a year is not available, then the index number for the next year cannot be obtained.