Laspeyres method and Paasche method SolutionLaspeyres price

Laspeyres method and Paasche method

Solution

Laspeyres price index number=sum(p1q0)/sum(p0q0)*100

Laspeyres=(4150000/3700000)*100=121.6

b) Paahes price index number=sum(p1q1)/sum(p0q1)*100

Paaches index number=(5500000/4900000)*100=112.24

c ) According to Laspeyres index number the price has increased by 21.6% in 2006 with respect to 2005.

According to Paasches index number the price has increased by 12.24% in 2006 with respect to 2005.

d) Laspeyres method over estimate the CPi.

Paaches method under estimates the CPI.

The best index that can be used is the Fishers index.