Question

If the ratio of Laspeyer’s and Fisher’s index number is 25: 24 and Paasche’s index number is 115.2, find

Laspeyer’s and fisher’s index number.​

Answer 1

Answer:

Do not be confused by the mathematical notations. The numerator is simply the total expenditures for all items at the observation period using base quantities, and the denominator is the total expenditures for all items at the base period use base quantities. Therefore, the Laspeyres Price Index can be more easily understood when rewritten as follows:

Modified Formula

Index Example

The following information regarding the change in the prices and quantities of each individual good in a hypothetical economy is provided. Determine the Laspeyres Price Index for Year 0, Year 1, and Year 2, using Year 0 as the base year.

Item Year 0 Year 1 Year 2

Good A $5 $10 $7

Good B $10 $12 $13

Good C $20 $25 $24

Item Year 0 Year 1 Year 2

Good A 100 125 150

Good B 200 225 250

Good C 300 325 350

Using the formula for the Laspeyres Price Index:

Year 0

Year 1

Year 2

Therefore, the price indexes were as follows for each year:

Year 0 (Base Year) = 100

Year 1 = 128.23

Year 2 = 123.53

Note that, with this index, the only changes are the prices over the years. The quantities for each good remain the same throughout the years.

Advantages and Disadvantages of the Laspeyres Price Index

The advantages of the index include:

Easy to calculate and commonly used

Cheap to construct

Quantities for future years do not need to be calculated – only base year quantities (weightings) ar

Step-by-step explanation:

hope it helps you