Thursday 21 May 2015

Laspeyres index and Paasche index

The two most basic formulae used to calculate price indices are the Paasche index (after the economist Hermann Paasche and the Laspeyres index (after the economist Etienne Laspeyres). Prices indexes help in measuring the price level or general cost of living. 
Laspeyres Index is an index used for measuring current prices or quantities in relation to

those of a selected base period. The Laspeyres price index tends to overstate price increases because, as prices change, consumers typically alter their purchasing decisions by selecting fewer products with large price increases while buying more products that show low or no price increases. If consumers can do this without reducing their total satisfaction, the use of base-period commodity selections tends to overstate declines in the standard of living.

Paasche Index is different from Laspeyres Index because in Paasche index is measured using goods using current year prices and current year quantities. Paasche index tends to understate it, because the indices do not account for the fact that consumers typically react to price changes by changing the quantities that they buy

Recently in news because Subramanian Swami Mentioned above two terms in his article about one year of Modi government


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