Inflation Indices

[ayousaf]

Can anyone explain the difference between the Paasche Index and the Laspreyes Index? I’m having a hard time trying to figure what is different between these two indices.
Thanks

 

[S2000magician]

A Laspeyres index keeps the same mix of goods year after year.
A Paasche index adjusts the mix of goods as consumers’ buying habits change.

 

[ayousaf]

S2000magician wrote:
A Laspeyres index keeps the same mix of goods year after year.
A Paasche index adjusts the mix of goods as consumers’ buying habits change.

I thought the basket that is used to measure the Laspreyes index was changed after a set time (the book says 5 years). So if both of the indices change goods they will give the same result?
I think this holds true if the basket stays constant over the period of measurement e.g.
T=1 P1=£2 P2=£3 Q1=50 Q2=50
T=2 P1=£4 P2=£5 Q1=50 Q2=50
Laspreyes Index = (200+250)/(100+150) = 450/350= 1.2857
From my understanding, in this case the Paasche Index = Laspreyes Index, so what is the effective difference?

 

[ayousaf]

Anyone?

 

[Finkid]

ayousaf wrote:
I thought the basket that is used to measure the Laspreyes index was changed after a set time (the book says 5 years). So if both of the indices change goods they will give the same result?
I think this holds true if the basket stays constant over the period of measurement e.g.
T=1 P1=£2 P2=£3 Q1=50 Q2=50
T=2 P1=£4 P2=£5 Q1=50 Q2=50
Laspreyes Index = (200+250)/(100+150) = 450/350= 1.2857

I am not too confident about this but I will give it a try.
Firstly, Laspreyes Index = (200+250)/(100+150) = 450/250= 1.8
In this case Paasche’s and Laspreyes Indices would both give the same result because the WEIGHTS (composition of baskets) are same in both time periods.
Laspreyes and Paasche’s indices would give different results when WEIGHTS (composition of baskets) are changed. So if there is no change in weights, the results would be same.

ayousaf wrote:
From my understanding, in this case the Paasche Index = Laspreyes Index, so what is the effective difference?

Generally, compostion of baskets change from one period to next. So these two indices would differ because Laspreyes index use OLD WEIGHTS and Paasche’s Index use NEW WEIGHTS. That’s the difference between them.
Mathematically, for only ONE product
Laspreyes Index= New Price * Old Weight
Paasche Index= New Price * New Weight
Hope this helps.

 

[S2000magician]

Finkid wrote:Laspreyes and Paasche’s indices would give different results when WEIGHTS (composition of baskets) are changed. So if there is no change in weights, the results would be same.

ayousaf wrote:
From my understanding, in this case the Paasche Index = Laspreyes Index, so what is the effective difference?

Generally, compostion of baskets change from one period to next. So these two indices would differ because Laspreyes index use OLD WEIGHTS and Paasche’s Index use NEW WEIGHTS. That’s the difference between them.
Mathematically, for only ONE product
Laspreyes Index= New Price * Old Weight
Paasche Index= New Price * New Weight
Hope this helps.

You’re correct. As I said,

S2000magician wrote:A Laspeyres index keeps the same mix of goods year after year.
A Paasche index adjusts the mix of goods as consumers’ buying habits change.