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Part 6:
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Index Numbers |
| Paasche's Index If we take a look back at our ice cream scenario, neither of the two indices we found take into account the quantity of each brand sold. It could be, for instance, that the shop sold 100 times as many tubs of Choconut as of all the rest put together. Unweighted indices, therefore, are of limited use. All of the more common indices actually used in real life are weighted indices. And what are weights? Weights are simply numbers which reflect the relative importance of a particular item when compared to other items. The most common index numbers in general use are both examples of weighted aggregative index numbers, and were invented during the nineteenth century, one by Etienne Laspeyres and the other by Hermann Paasche. When faced with the choice of using figures from the base year or figures from the current (or new) year as weights, Paasche opted for the current year, arguing that they are of more relevance, and it is Paasche's Index that we will look at now. (Laspeyres, on the other hand, argued for using base year figures as weights - an argument we won't go into here!)
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