Many people whose professions are not related to economics or statistics are constantly wondering about the need for economic indices. Of course, not everyone can list more than three indices, and the majority are not even familiar with such names as Paasche, Layspers and Fischer, not to mention their economic studies and works.
It is worth noting that the use of indexes helps to identify certain trends in the world of finance and securities and, thanks to this, to avoid economic disasters and crises. The recent economic crisis has made it clear that the consequences of the collapse of financial systems will be detrimental not only to a particular region, but will echo throughout the world.
Paasche Index
This index was derived in 1874 by the German scientist G. Paasche. Each index carries a certain semantic load. By identifying the patterns of correlation of certain indicators in specific situations, we can draw conclusions about the upcoming state of the economy, price changes, increase or decrease in demand. The Paasche index shows changes in the level of prices for the mass of goods.
Paache index calculation
The advantage of the Paasche index is that its calculation does not require deep mathematical or economic knowledge. Knowing the real price level, as well as the level of the period, which is taken as the base, you can easily calculate the Paasche index yourself. Its formula is as follows:
I p = ∑p 1 q 1 / ∑p 0 q 1 ,
where ∑ is the mathematical sign of the sum;
p 1 - the price of products in the reporting period;
p 0 - the price of products in the period taken as the base;
q 1 - the volume of sales in the reporting period.
Thus,
the Paasche
price index shows the ratio of the actual cost of production to the value of the same volume of products, but sold at prices of the period taken as the base. Based on this, we can conclude about an increase or decrease in the general price level, rather than a separate category.
The relevance of the price index
The modern market is full of goods that belong to previously non-existent categories. A section of luxury has appeared, which implies the availability of items whose value is completely not justified by the cost of their production. In the context of inflation, groups of goods appear that completely leave the market and, accordingly, cannot be considered in order to calculate the Paasche index.
All this leads to the fact that the Paasche index has become less popular and relevant than, for example, Fisher. This is due to economic instability, and fashion, and the rapid change in consumer preferences. But, regardless of all this, the contribution that this scientist made to the development of economic theory and statistics is simply invaluable. The Paasche index has been instrumental in accounting for consumer prices and has also been of great benefit in its time. Maybe today these data are not so actively used, but they have taken their place of honor in the history of science. They are studied at all universities of economic profile, and this suggests that the Paasche index is not forgotten.