Comparing the Laspeyres and Paasche Indexes Ideal index is 252 Laspeyres price

# Comparing the laspeyres and paasche indexes ideal

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Comparing the Laspeyres and Paasche Indexes Ideal index is 252 Laspeyres price index: 100 * \$1720/\$500 = 344 (overstate CPI) Paasche price index is 100 * \$1260/\$720 = 175 (understate CPI) 300 lbs * \$2/lb. + 6 books * \$20/book 100 lbs. * \$2.20/lb. + 15 books * \$100/book

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42 of 40 fixed-weight index Cost-of-living index in which the quantities of goods and services remain unchanged. chain-weighted price index Cost-of-living index that accounts for changes in quantities of goods and services. Price Indexes in the United States: Chain Weighting A commission chaired by Stanford University professor Michael Boskin concluded that the CPI overstated inflation by approximately 1.1 percentage points a significant amount given the relatively low rate of inflation in the United States in recent years. Approximately 0.4 percentage points of the 1.1-percentage-point bias was due to the failure of the Laspeyres price index to account for changes in the current year mix of consumption of the products in the base-year bundle. EXAMPLE 3.8 THE BIAS IN THE CPI
• Fall '18
• Mike Leu

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