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Paasche and Laspeyre Index

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Paasche and Laspeyre Index

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • April 14, 2018 at 4:49 pm #446657
    erin17
    Member
    • Topics: 2
    • Replies: 0
    • ☆

    I looked at the notes for F2, but I couldn’t find a clear explanation. I also watched your lecture, but I would like to make it clear.

    How does the Laspeyre index tend to overstate inflation and the Paasche index understate inflation?

    With the Laspeyre overstating inflation, is it because you use the same quantity each year but different prices? If so, how does that overstate inflation?

    How about Paasche?

    Thank you!

    April 15, 2018 at 10:10 am #446701
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    If the price of something increases, then people are likely to buy less of that item. So the overall effect of the price increase on them is likely to be lower.

    Laspeyre assumes they continue to buy the same quantities as in the base year.
    Paasche uses the current quantities and therefore the price rise will have less affect on the overall cost of the ‘basket’.

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