Question

QUESTION 3 1301 Table below shows the price per kilogram (kg) and quantity of each of the three raw materials X, Y and Z for 2014, 2015 and 2016. Material Price (RM) Quantity (kg) 2014 2015 20162014 2015 2016 X 1.20 0.60 0.80 400 500 300 Y 1.50 2.00 2.50 300 450 350 Z 3.00 5.50 5.00 300 250 400 Calculate the a) Relative quantity index for materials X and Z for 2016 using 2014 as the base year and explain the results obtained. year and briefly explain its meaning year and briefly explain its meaning b) Laspeyres' price index for 2015 using 2014 as the base e) Paasche's price index for 2016 using 2015 as the base

Answer 1

Relative quantity index is (Q11/Q10 + Q31/Q30)/2=(300/400+400/300)/2=104%. Thus on an average people buy 4% more in 2016 than 2014 in X and Z.

Laspeyres index is Ratio of Sum over P*Q over the two periods.The quantity is that of the base period. Thus Ratio is (0.6*400+2*300+5.5*300)/(1.2*400+1.5*300+3*300) = 1.36. It gives a meaningful comparison of the representative prices in the two period from 2014 to 15 had the quantity consumption remained the same.

Paasce's index is Ratio of sum of price and quantity. Here quantity changes with change in observation period.

Thus ratio is.(0.8*300+2.5*350+5*400)/(0.6*500+2*450+5.5*250) = 1.21. This gives a meaningful comparison in change in price in 2016 as compared to 2015. It considers the consumption pattern in the future period also.