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CA Foundation · Quantitative Aptitude · Index Numbers

Which one of the following statements about the Laspeyres price index is correct?

The Laspeyres price index uses base-year quantities as weights, so the weights stay fixed and need not be revised each year. Current-year weights belong to Paasche, and factor reversal is satisfied by Fisher's ideal index, which is the geometric mean of Laspeyres and Paasche.

  1. AIt uses current-year quantities as weights
  2. BIt is the geometric mean of the Paasche index and the simple aggregative index
  3. CIt uses base-year quantities as weights, so the weights need not be revised each yearCorrect
  4. DIt satisfies the factor reversal test

Explanation

The Laspeyres index weights prices by base-year quantities, so the same weights are used every year and only new prices are needed. Current-year quantities are the Paasche weights. Fisher's ideal index, not Laspeyres, satisfies the factor reversal test, and it is the geometric mean of Laspeyres and Paasche.

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