Differences Between Laspeyres and Paasche

Written by dan harkins
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Differences Between Laspeyres and Paasche
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The Laspeyres and Paasche indexes refer to the two most common measures of price changes used by economists, both in the 21st century and a century ago. Laspeyres-influenced indexes, like the consumer and producer price indexes, define the prices of goods in a base period then use the prices for those goods to examine change over space and time. Indexes compiled in a Paasche style price items today, then compare those prices to goods of earlier periods.

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What They Gauge

Price indexes take an average of the changes in various prices and seek to make comparisons with another period in time. A volume index is an average of quantity changes. Most economists use the Laspeyres and Paasche formulas to better analyse them both.

LasPeyres and Paasche

Étienne Laspeyres, a German economist, developed in 1871 the "index number formula" method for determining the rate of inflation, compiling the ratio of what goods cost now and in a predetermined base period. Hermann Paasche, another German economist of the same era, provided another way of determining inflation by calculating the prices today, then comparing these prices to a former period. Both methods, according to the U.N. Statistics Division, compare weighted averages of prices in set periods.

Two Means to Similar End

The Laspeyres index takes a weighted arithmetic average of the price relatives using the values of the earlier period as weights, according to the U.N. On the other hand, Paasche indexes are reciprocal to Laspeyres indexes by using the values of the later period as weights. See the U.N. link in the Resources section for a rundown of the arithmetic.

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