A simple index number :: Economics

A simple index number Index numbers is a number that expresses the relative change in price, quantity, or value from one period to another (1). Price index number = cost of basket in current period x 100 cost of basket in base period An index number provides a quantitative description of change over time - how much increase? How much decrease? Market researchers are also using index numbers are also using index numbers to compare a research result with an overall norm, to measure how the investment, specially in advertising industry, are working. How changes in these figures are related to the current economy as advertising is promoted as an engine that drives the economy rather than a supplement? 2. A composite index 2.1 Laspeyres Price Index The most commonly used weighted price index is the Laspeyres Price Index named after its inventor. It is a weighted aggregate price index that uses the quantities in the base period/ year as weights (Harper, 1991,p215). In essence, Laspeyres price index for the year measured shows the extent of price changes since base year on the assumption that the expenditure pattern was the same in the year measured as in base year. Thus, only price is allowed to change and the index for the current period reflects this price. 2.2 Paasche Price Index Another weighted price index is the Paasche Price Index, which uses the current quantity weights and adjusts the base each time a new period is considered. It is a weighted aggregate price index that uses the quantities in the current year as the weights (Harper, 1991,p215). Paasche price index shows the changes assuming the expenditure pattern was the same in base year as in the year measured. 2.3 Advantages and Limitations Both the Laspeyres index and the Paasche index have advantages and limitations, as indicated following: 2.3.1 Advantages Laspeyres index  · Easy to calculate.  · The Laspeyres index is the more convenient to use on a continuing basis, because the weights of base year remain fixed.  · It can be easier and cheaper to produce since the only quantities required are for the base period.  · Laspeyres where the same base weights can be used for a number of periods making it less demanding of data. As the weights don't change period to period (fixed basket) it can be considered to show exclusively price (or quantity) change (1). Paasche index -------------  · Uses quantities from the current period, thus reflects current buying habits 2.3.2 Limitations Laspeyres index  · It cannot be used if quantities are unobtainable.  · Laspeyres, as time moves on the fixed basket becomes less relevant. Paasche index  · There can be a mass of statistical data requirement, as Paasche