Paasche Index


The Paasche index compares the cost of purchasing the current basket of goods and services with the cost of purchasing the same basket in an earlier period. The prices are weighted by the quantities of the current period. This means that each time the index is calculated, the weights are different. Formulae with changing weights, such as the Paasche Index, involve the collection of substantial additional data, since information on current expenditure patterns, as well as prices, must be obtained continuously. Usually, the time taken to process current expenditure data and to derive revised weights precludes the preparation of a timely Paasche index.

Because of the difference in the weightings used for the Laspeyres and Paasche indexes (Laspeyres uses base period weights, Paasche uses current period weights), the two indexes will produce different results for the same period. This is because, in real life, expenditure patterns change from period to period as new commodities become available and as consumer tastes change. Changes also occur in response to price increases as buyers attempt to minimise total outlays, while attempting to maintain the same standard of living, by purchasing goods and services that are now relatively less expensive than those purchased in the base period. When this occurs, commodities whose prices have risen more than the average will tend to have weights in the current period that are relatively smaller than in the base period, and therefore will have relatively less weight in a Paasche index than in a Laspeyres index.

This means that a Paasche index will tend to produce a lower estimate of inflation than a Laspeyres index when prices are increasing and a higher estimate when prices are decreasing. In practice, Laspeyres and Paasche indexes usually give similar results, provided the periods being compared are not too far apart. The greater the length of time between the two periods being compared, the more opportunity there is for differential price and quantity movements and hence differences between the two indexes. (c.f. Laspeyres , Fisher Ideal, Marshall-Edgeworth, Tornqvist indexes)


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