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  1. Hi,

    I am bit confused about what you mentioned in the lecture —-when you use Paasche Index, you can’t compare year to year, because you are using different quantities.

    I thought we have to use the “current basket” which means the quantities applied to different years are the same, so why can’t we use compare year to year when we use Passche Index. Hope this makes sense. Many thanks.

    • In paasche, You are comparing each year to the base year only for eg 2008 & 2009 and 2008 and 2010.

      so 2009 and 2010 are using different quantities (in their respective years) when compared to 2008 thus you cant compare 2009 amd 2010 as their shopping basket quantities are different.

      Hope this helps.

  4. Hi John,

    I really need your assistance with this question:

    A production process uses 10 batches of Product A and 30 of product B each year. The costs are as follows:

    Product A – 2011 $6.50, 2012 $6.90
    Product B – 2011 $2.20, 2012 $2.50

    Construct a price index using
    (1) Quantity weights
    (2) Value weights

    Answer given for (1) A – 2011, 6.50 = 100, 690 = 106.20 x 10 = 1062
    (2) B – 2012, 2.20 = 100, 250 = 113.64 x 30 = 3409

    I’m not sure of how they arrived at the figures 106,20 and 113.64.

    Grateful for your assistance

  5. In lecture notes for the example 3 the quantities are different for each year (2008 sugar 15, 2009 sugar 18, 2010 sugar 20). In vdeo lectures, we took the same quantities each year (2008, 2009, 2010 sugar 15).

    • It is because we are calculating a price index and therefore we must use the same quantities for each of the two years.

      Which quantities we use depends on whether we are calculating a Lapser price index or a Paasche price index.

      I really do suggest that you watch the lectures again because this is explained.

    • I honestly cannot remember when the lecture was recorded. However I really do not why you are interested.

      All our lectures are always relevant for the next exams. They are reviewed after every exam and if the syllabus changes then lectures are removed or re recorded or new lectures added.

      Why do you hope that is was recently recorded??

    • The index numbers for 2007 and 2008 are telling you that for every $108.2 that was spent in 2007 we would have to spend $119 in 2008.

      So…….if we actually spent $0.40 in 2007 it would cost in 2008: 119/108.2 x $0.40

      (Another way you can look at it is this. Something that cost 108.2 in 2007 would have gone up by 10.80 in 2008 (119 – 108.2). This is an increase of 10.8/108.2 x 100 = 9.982%.
      So….if something cost $0.40 in 2007, then add on 9.982% and you will get a cost of $0.44 in 2008)

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