Question

Given the following prices and quantities

Price (per kg)

Quantities produced

	2008	2013	2018	2008	2013	2018
Milk	3.95	3.89	4.13	675	717	436
Cheese	61.50	62.20	59.70	117	115	115
butter	34.50	35.40	38.90	77	74	82

Compute and interpret the Laspeyres price index number for the year 2018 with 2008 as base.

Compute the interpret the Paasche’s price index number for the year 2018 with 2008 as base

Answer 1

solution:

laspeyre's price index for the year 2018, using 2008 as base year

laspeyre's price index =

paasche's price index for the year 2018, using 2008 as base year

paasche's price index =

interpretation of laspeyre's price index

The cost of collection of 675 kg. of milk, 117 kg. of cheese and 77 kg of butter has increased by 2 % in year 2018 as compared to what it was in 2008. viewed differently, it indicate that a fixed amount of goods sold at 2018 price yield 2 % more revenue than what it did at 2008 prices.

interpretation of paasche's price index

the cost of collection of fixed basket of goods containing 436 kg of milk, 115 kg of cheese, and 82 kg of butter in 2018 is about 2% more than the cost of collection the same basket in the year 2008. viewed differently , it indicate that the fixed basket of goods sold at 2018 prices yeild 2% more revenue than what it have earned in 2008 prices.