Question

Explain the difference between chain-weighted indices and others. Why are the chain-weighted variety used for prices, specifically?

Answer 1

The traditional approach for measuring real GDP was with the usage of constant price estimates. The method used the prices from a fixed base year for computation of the value of current output. It is the similar as multiplying a Laspeyres volume index of a provided year’s output with a base year that was fixed by the current value of base year output (i.e., base prices * base quantities.). On contrary, The chain volume measure compounds together Laspeyres volume indices wherein the base year is considered the year before the current year in the series. Afterwards real GDP estimate is computed by multiplying the index by the current value of last year’s output.

The chain-weighted CPI is categorised to be more accurate inflation gauge than the traditional fixed-weighted CPI, because the method not only accounts the periodic changes in the price of a fixed basket of goods, it also considers for the fact that consumers’ purchasing decisions change along with changes in prices. Another vital advantage is that chain-weighted indices measures value output of final goods and services for any term period of what the structure of the economy was at the time.