Paasche index definition. Paasche Index (Definition, Formula) 2022-10-09
Paasche index definition Rating:
6,7/10
458
reviews
The Paasche index is a measure of price change in an economy or specific market over a given period of time. It is used to determine the rate of inflation or deflation in an economy, and to compare the purchasing power of money in different periods.
The Paasche index is named after the German economist Hermann Paasche, who developed the concept in the late 19th century. It is an extension of the Laspeyres index, which was developed by the French economist Jean-Baptiste Laspeyres in the late 1800s. Both the Paasche and Laspeyres indices are types of price indices, which are statistical measures used to compare the prices of a basket of goods and services over time.
The Paasche index is calculated by taking the ratio of the current price of a basket of goods and services to the price of the same basket in a base period. This ratio is then multiplied by the base period's price level to obtain the current price level. For example, if the current price of a basket of goods and services is $100, and the price of the same basket in the base period was $80, the Paasche index would be calculated as follows:
Paasche index = ($100 / $80) * $80 = $100
This means that the current price level is equal to the base period's price level.
One key difference between the Paasche and Laspeyres indices is the way that they weight the prices of different goods and services in the basket. The Laspeyres index uses the base period's quantities of goods and services to weight the prices, while the Paasche index uses the current period's quantities. This means that the Paasche index is more sensitive to changes in the quantities of goods and services consumed, while the Laspeyres index is more sensitive to changes in their prices.
The Paasche index is commonly used to measure inflation and deflation in an economy, as it reflects changes in the prices of goods and services that are actually being consumed in the current period. It is also used to compare the purchasing power of money in different periods, as it shows how much of a basket of goods and services can be purchased with a given amount of money.
Overall, the Paasche index is a useful tool for understanding changes in the prices of goods and services in an economy or market over time, and for comparing the purchasing power of money in different periods.
Paasche's index financial definition of Paasche's index
Published by Houghton Mifflin Company. So, which year to be selected for the Year 0 itself is debatable. Source Publication: ILO, IMF, OECD, Eurostat, UNECE, World Bank, 2004, Producer Price Index Manual: Theory and Practice, International Monetary Fund, Washington DC. Recommended Articles This has been a guide to the Paasche Price Index and its definition. Cross References: Hyperlink: Statistical Theme: Prices and purchasing power partities Created on Tuesday, September 25, 2001 Last updated on Friday, July 8, 2005.
What is the Paasche Price Index? The GDP deflator is a more broadly based and, many economists argue, a better measure of inflation than the consumer price index or the producer price index. A price index used to adjust gross domestic product for changes in prices of goods and services included in the GDP. The current period serves as the weight reference period and the base period as the price reference period. Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Advantages The Paasche index is one of the most important tools to observe the inflation in the basket of goods and services by comparing the current levels and quantity available with the base year prices.
Published by Houghton Mifflin Company. See Collins Dictionary of Business, 3rd ed. It is identical with a weighted harmonic average of the current to base period price relatives using the value shares of the current period as weights. The Paasche price index is an index formula used in price statistics for measuring the price development of the basket of goods and services that is consumed in the current period. Points to Note A significant change in the Paasche price index will signal the government authorities that some action needs to be taken for its sudden increase or sudden fall. Therefore, the index can be more easily understood when rewritten as follows: Example The following information regarding the change in the prices and quantities of each individual good in a hypothetical economy is provided.
Disadvantages Following are the disadvantages of the Paasche index. Although the mathematical equation for the Paasche Price Index seems confusing, the numerator is simply the total expenditure for all items at the observation period using current observation period quantities and prices, while the denominator is the total expenditure for all items at the base period using current observation period quantities and base period prices. On the other hand, very high growth in the index may turn detrimental to the interest of the common people to buy the essential commodities at high prices. However, it relies on current data which may not be readily available and tends to understate the changes in price. Here we discuss the formula to calculate the Paasche Price Index along with examples, advantages, and disadvantages.
Paasche price index financial definition of Paasche price index
Also called gross domestic product deflator. We are comparing the current year observation year prices to the base year prices at the same quantities. . In similar fashion, a Financial Times Stock Exchange FTSE - 100 share index is used to measure change in the price of. Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L.
Therefore, the plans and policies would be drafted keeping in mind the Paasche price index ratio worked out and analyzing its impact on the economy on the common people. Conclusion The Paasche Price Index is one of the key ratios to determine the velocity of Inflation in the basket of goods and services. French Equivalent: Indice de prix de Paasche Definition: A price index defined as a fixed weight, or fixed basket, index which uses the basket of goods and services of the current period. This index has been widely used in the economic work and the Finance Ministry to be aware of the inflation trends. . . .
