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CA Foundation · Quantitative Aptitude · Index Numbers

A Laspeyres price index for a group of items is 120. Using the same data, the Paasche price index is 100. Which statement about the source of the difference is correct?

Laspeyres uses base year quantities as weights and Paasche uses current year quantities. Because the weights differ, the two indices give different values from the same price data, showing that the choice of weighting system affects the index.

  1. ALaspeyres uses current year quantities as weights, while Paasche uses base year quantities
  2. BLaspeyres uses base year quantities as weights, while Paasche uses current year quantities, so the choice of weights affects the resultCorrect
  3. CBoth use the same weights, so the difference must be due to arithmetic error
  4. DThe difference arises only because Paasche uses the geometric mean

Explanation

Laspeyres weights prices by base year quantities (Σp1q0/Σp0q0), while Paasche uses current year quantities (Σp1q1/Σp0q1). Different weights give different values, which is the weighting problem in index numbers. The first option reverses the definitions.

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