A simple index number :: Economics

A simple index numberIndex numbers is a number that expresses the relative change in legal injury,quantity, or value from one period to another (1).Price index number = cost of basket in current period x snowcost of basket in base periodAn index number provides a quantitative description of change overtime - how much annex? How much decrease?Market researchers are also using index numbers are also using indexnumbers to compare a research result with an overall norm, to measurehow the investment, specially in advertise industry, are working.How changes in these figures are related to the current economy asadvertising is promoted as an engine that drives the economy ratherthan a supplement?2. A composite index2.1 Laspeyres Price IndexThe most commonly used plodding worth index is the Laspeyres PriceIndex named after its inventor. It is a plodding aggregate price indexthat uses the quantities in the base period/ year as weights (Harper,1991,p215). In essence, Laspeyres price ind ex for the year measuredshows the extent of price changes since base year on the assumptionthat the expenditure pattern was the same in the year measured as inbase year. Thus, only price is allowed to change and the index for thecurrent period reflects this price.2.2 Paasche Price IndexAnother weighted price index is the Paasche Price Index, which usesthe current quantity weights and adjusts the base each time a newperiod is considered. It is a weighted aggregate price index that usesthe quantities in the current year as the weights (Harper, 1991,p215).Paasche price index shows the changes assuming the expenditure patternwas the same in base year as in the year measured.2.3 Advantages and LimitationsBoth the Laspeyres index and the Paasche index have advantages andlimitations, as indicated following2.3.1 AdvantagesLaspeyres index Easy to calculate. The Laspeyres index is the more convenient to use on a continuing basis, because the weights of base year remain fixed. It potty be ea sier and cheaper to produce since the only quantities required are for the base period. Laspeyres where the same base weights can be used for a number of periods making it less demanding of data. As the weights dont change period to period (fixed basket) it can be considered to show exclusively price (or quantity) change (1).Paasche index------------- Uses quantities from the current period, thus reflects current buying habits2.3.2 LimitationsLaspeyres index It cannot be used if quantities are unobtainable. Laspeyres, as time moves on the fixed basket becomes less relevant.Paasche index There can be a mass of statistical data requirement, as Paasche