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Hello Tutor,I would like to ask why the Laspeyre price index tends to overstate inflation and Laspeyre index tends to understate inflation? I can’t understand the logic behind ,can you explain to me? Thank you very much:-)
If one item in the ‘typical shopping basket’ goes up in price, then people are likely to buy less of it and therefore the quantity of it will fall.
Laspeyre uses the base period quantities to work out the average. Paasche uses the current year quantities and if the quantity is lower than not as much of the items with high inflation on them will be taken in the calculation of the average.
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