Weighted Aggregative Method: Laspeyre, Paasche & Fisher Methods; Practical Problem | Index Numbers

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🚩Timestamps:-

00:07 previously

00:31 Session Agenda

01:22 WEIGHTED AGGREGATIVE METHOD

03:55 Laspeyre's Method

04:37 Paasche's Method

06:00 Basic Difference between Laspeyre and Paasche's Method

06:41 Fisher's Method

08:57 Fisher's Index Number as an Ideal Method

15:49 Practical Problem 2 (Laspeyre, Paasche & Fisher Methods)

22:13 Concluding Remarks (upcoming session…)

Learning Outcomes:-

Through this module, you will gain understanding on:-

4.   WEIGHTED AGGREGATIVE METHOD

5.   Laspeyre's Method

6.   Paasche's Method

7.   Fisher's Method

8.   Fisher's Index Number as an Ideal Method

9.   Time Reversal test (TRT)

10.               Factor Reversal Test (FRT)

11.               Practical Problem 2 (Laspeyre, Paasche & Fisher Methods)

WEIGHTED AGGREGATIVE METHOD

·        Under this method, different goods are accorded weight according to the quantity bought.

·        Economists have different views in this respect. Should the weight be given

(i) on the basis of the quantity bought in the current year or

(ii) on the basis of the quantity bought in the base year or

(iii) on the basis of the quantities bought in both the years?

Different economists have, therefore, suggested different techniques of weighting. Some of the well known methods are as under:

 

 (1) Laspeyre's Method:

Laspeyre's uses base year quantities (q0) as weights of different items. His formula for estimating Index values is:

(2) Paasche's Method:

Paasche's on the other hand uses current year's quantities (q1) as weight. His formula to construct the Index value is:

What is the basic difference between Laspeyre's and Paasche's methods of construction of Weighted index Numbers?

Laspeyre uses base year quantities as the weights of different items. Paasche on the other hand, uses current year quantities as weights.

 

(3) Fisher's Method:

Fisher has combined the techniques of Laspeyre's and Paasche's method. He used both base year as well as current year quantities (q0, q1) as weight. His formula to construct Index Number is:

Fisher's Index Number as an Ideal Method

The choice of method for the construction of an index number will depend upon the object with which a particular index number is constructed. Many formulae may be used for the construction of index numbers but all may not be suitable for the specific purpose in hand. Some of the important formulae do not conform to certain appropriate test of consistent behaviour; it implies that these formulae give us biased results. However, Fisher's Method is considered as an 'ideal' method for constructing index numbers:

 

Fisher's Method is considered as 'ideal' because

 (1) It is based on variable weights.

 (2) It takes into consideration the price and quantities of both the base year and current year.

(3) It is based on geometric mean (GM) which is regarded as the best mean for calculating index number.

 (4) Fisher's index number satisfies both the Time Reversal Test and Factor Reversal Test.

·        The time reversal test implies that the formula for calculating an Index Number should be such that will give the same ratio between one point of comparison and the other, no matter which of the two is taken as base. Time Reversal means that if we change base year to current year and vice versa then the product of two indexes should be equal to unity. Thus, an index number should work both ways, i.e., forward as well as backward.

·         On the other hand,

Factor Reversal Test implies, just as our formula should permit the interchange of two items without giving inconsistent results, so it ought to permit interchange of prices and quantities without giving inconsistent results, i.e., the two results multiplied together should be equal to value ratio.

Items

2004 Base Year (0)

2014 Current Yr (1)

 

Price

Quantity

P

Q

A

10

10

20

25

B

35

3

40

10

C

30

5

20

15

D

10

20

8

20

E

40

2

40

5



Introduction to Time reversal test|Factor reversal test|Circular test|Index numbers|BBA|BCA|B.COM

 

https://www.youtube.com/watch?v=fh7kDWCowXQ

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WEIGHTED AGGREGATIVE METHOD, Laspeyre's Method, Paasche's Method, Basic Difference between Laspeyre and Paasche's Method, Fisher's Method, Fisher's Index Number as an Ideal Method, Practical Problem 2 (Laspeyre, Paasche & Fisher Methods) | Index Numbers | 11th Commerce | by @statomics11comm

 

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