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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers4 Marks
Question
Distinguish between Lasperey's and Paasche's index numbers.
✓

Answer

  1. In Lasperey's index number base year quantities are taken as the weights and in Paasche's index the current year quantities are taken as weights.
  2. From the practical point of view Lasperey's index is often proffered to Paasche's for the simple reason that Lasperey's index weights are the base year quantities and do not change from the year to the next. On the other hand Paasche's index weights are the current year quantities, and in most cases these weights are difficult to obtain and expensive.
  3. Lasperey's index number is said to be have upward bias because it tends to over estimate the price rise, where as the Paasche's index number is said to have downward bias, because it tends to under estimate the price rise.
  4. When the prices increase, there is usually a reduction in the consumption of those items whose prices have increased. Hence using base year weights in the Lasperey's index, we will be giving too much weight to the prices that have increased the most and the numerator will be too large. Due to similar considerations, Paasche's index number using given year weights under estimates the rise in price and hence has down ward bias.
  5. If changes in prices and quantities between the reference period and the base period are moderate, both Lasperey's and Paasche's indices give nearly the same values.
  6. Paasche's index number, because of its dependence on given year's weight, has distinct disadvantage that the weights are required to be revised and computed for each period, adding extra cost towards the collection of data.

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