How relevant is the Paasche index

Many people whose professions are not connected witheconomy or statistics, are constantly being asked about the need for economic indices. Of course, not everyone can list more than three indices, and most people do not even know such names as Paasche, Laispers and Fischer, not to mention their economic research and work.

It should be noted that the use of indexeshelps to identify certain trends in the world of finance and securities and, due to this, avoid economic disasters and crises. The recent economic crisis has made it clear that the consequences of the collapse of financial systems will be disastrous not only for a particular region, but will echo in all corners of the earth.

The Paasche index

This index was derived in 1874 by the Germanscientist G. Paasche. Each index carries a certain semantic load. By revealing the patterns of the ratios of certain indicators in specific situations, one can draw conclusions about the upcoming state of the economy, price changes, an increase or a decrease in demand. The Paasche index shows changes in the level of prices for the mass of goods.

Calculation of the Paasche index

The advantage of the Paasche index is that forits calculation does not require deep mathematical or economic knowledge. Knowing the current level of prices, as well as the level of the period that is accepted as the basic one, you can easily calculate the Paasche index yourself. The formula is the following:

AND_P= Σp₁to₁/ Σp₀to₁,

where Σ is the mathematical sign of the sum;

P₁ - the price for the products in the reporting period;

P₀ - the price of the product in the period taken as the basis;

to₁ - the volume of sales in the reporting period.

Thus, the price index of Paasche showsthe ratio of the actual cost of production to the value of the same volume of output, but realized at the prices of the period adopted for the base. Based on this, it can be concluded that the general price level is increasing or decreasing, rather than a separate category.

The relevance of the price index

The modern market is full of goods thatbelong to previously non-existent categories. There was a section of luxury, which implies the availability of items, the cost of which is absolutely not justified by the costs of their production. In the conditions of inflation, there are groups of goods that completely disappear from the market and, accordingly, can not be considered in order to calculate the Paasche index.

All this leads to the fact that the Paasche index has becomeless popular and relevant than, for example, Fisher. This is due to economic instability, and fashion, and a 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 helped the consumer to take into account consumer prices and also brought huge benefits in due time. Maybe today these data are not used so actively, but they took their place of honor in the history of science. They are studied in all universities of the economic profile, and this allows us to state that the Paasche index is not forgotten.