ExpertMedium2 marksMultiple Choice
ACCA · Question 10 · B. Data analysis and statistical techniques
A biotech laboratory uses index numbers to track the cost of specialized chemical reagents over time. They decide to use a Laspeyres price index rather than a Paasche price index.
Which of the following is a characteristic of the Laspeyres price index?
A biotech laboratory uses index numbers to track the cost of specialized chemical reagents over time. They decide to use a Laspeyres price index rather than a Paasche price index.
Which of the following is a characteristic of the Laspeyres price index?
Answer options:
A.
It uses current-year quantities as weights, requiring quantities to be recalculated every year.
B.
It uses base-year quantities as weights, which can overstate inflation if consumers substitute cheaper goods.
C.
It takes the geometric mean of base-year and current-year quantities.
D.
It tends to understate inflation compared to the Paasche index.
How to approach this question
Remember that Laspeyres = 'Late' (base year weights). Because the basket doesn't change, it ignores people switching to cheaper alternatives.
Full Answer
B.It uses base-year quantities as weights, which can overstate inflation if consumers substitute cheaper goods.✓ Correct
The Laspeyres price index uses base-year quantities as weights. A major disadvantage is that it does not account for changes in consumption patterns (the substitution effect), thereby tending to overstate inflation.
Common mistakes
Confusing Laspeyres (base year weights) with Paasche (current year weights).
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