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Laspeyres Advantages: Requires Quantity Data From Only The Base Period. This Allows A

There are two main types of price indexes discussed: the Laspeyres index and the Paasche index. The Laspeyres index uses quantity data only from the base period, allowing for a meaningful price comparison over time but it does not reflect changes in buying patterns. The Paasche index uses current period quantity data, reflecting current buying habits but requires recomputing prices each year. Fisher's ideal index is proposed to offset the shortcomings of these by taking the geometric mean of the Laspeyres and Paasche indexes.

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450 views1 page

Laspeyres Advantages: Requires Quantity Data From Only The Base Period. This Allows A

There are two main types of price indexes discussed: the Laspeyres index and the Paasche index. The Laspeyres index uses quantity data only from the base period, allowing for a meaningful price comparison over time but it does not reflect changes in buying patterns. The Paasche index uses current period quantity data, reflecting current buying habits but requires recomputing prices each year. Fisher's ideal index is proposed to offset the shortcomings of these by taking the geometric mean of the Laspeyres and Paasche indexes.

Uploaded by

Orko Abir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as RTF, PDF, TXT or read online on Scribd
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Laspeyres Advantages: Requires quantity data from only the base period.

This allows a
more meaningful comparison over time. The changes in the index can be attributed to
changes in the price.
Disadvantages: Does not reflect changes in buying patterns over time. Also, it may
overweight goods whose prices increase.
Paasche
Advantages Because it uses quantities from the current period, it reflects current buying
habits.
Disadvantages It requires quantity data for the current year. Because different quantities
are used each year, it is impossible to attribute changes in the index to changes in price
alone. It tends to overweight the goods whose prices have declined. It requires
the prices to be recomputed each year

Laspeyres index tends to overweight goods whose prices have increased. Paasches
index, on the other hand, tends to overweight goods whose prices have gone down. In an
attempt to offset these shortcomings, Irving Fisher proposed an index called Fishers
ideal index. It is the geometric mean of the Laspeyres and Paasche indexes.

An index number measures the relative change from one period to another.
The major characteristics of an index are:
It is a percentage, but the percent sign is usually omitted.
It has a base period.
Most indexes are reported to the nearest tenth of a percent, such as 153.1.
The base of most indexes is 100.
The reasons for computing an index are:
It facilitates the comparison of unlike series.
If the numbers are very large, often it is easier to comprehend the change of the index than the
actual numbers.
II. There are two types of price indexes, unweighted and weighted.
In an unweighted index, we do not consider the quantities.
in a simple index, we compare the base period to the given period.
where pt refers to the price in the current period, and p0 is the price in the base period.
In the simple average of price indexes, we add the simple indexes for each item and divide by the
number of items.
In a simple aggregate price index, the price of the items in the group are totaled for both periods
and compared.

In a weighted index, the quantities are considered.


In the Laspeyres method, the base period quantities are used in both the base period and the given
period.
In the Paasche method, current period quantities are used.

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