Question

We have the following data on the consumption behaviour of the average Finnish university student.

The first period represents a time before the average student was had begun to practice social distancing and the second period is after the student has started to practice social distancing.

		First Period			Second Period
	Video games & streaming	Hobbies	Food & beverages	Video games & streaming	Hobbies	Food & beverages
Price (euros)	29	118	10	29	130	11
Volume (units)	1	2.5	1	1.5	1.5	0.8

The Laspeyres' index of price for the above data is 1.093. What does Laspeyres' index of price describe and what does the index number of 1.093 tell you?

Answer 1

Laspeyres' price index is a consumer price index used to measure the change in price of a basket of goods and services over time relative to a certain period of time called the base period. laspeyres' price index is given by the formula:

where:

• Pi(0) = Price of individual item at base period
• Pi(t) = Price of individual item at observation period.
• Qi(0) = Quantity or volume of individual item at base period.

1. Here the Laspeyres' index is used to measure the change in price of the above set of goods and services in the second period( after students started to practice social distancing) relative to first period( before students started to practice social distancing).
2. A laspeyres' index value greater than 1 shows that the price has increased in the observation period relative to the base period.
3. Since the given value of Laspeyres' index is 1.093 the price has increased for the given set of services and goods in second period relative to the first period.