BUAD 806 Assignment

1. Given are the following price-quantity data of three items with price quoted in Naira per kg and
production in qtls

2021 2022
Items
Price Production Price Production

Rice 15 500 20 600

Beans 18 590 23 640

Semovita 22 450 24 500

Construct and interprete:

 Laspeyre’s Price and quantity Index for 2022, using 2021 as the base

 Paasche’s Price and quantity Index for 2012, using 2021 as the bas2.

Explain five (5) problems involved in the construction of index numbers

Answer:

To calculate Laspeyre's and Paasche's Price and Quantity Indexes for 2022 using 2021 as the base year,
you can use the following formulas:

Laspeyre's Price Index (LPI):

LPI measures the change in the total cost of a fixed basket of goods between two periods. It uses the
base year's quantities and current year's prices.

LPI = (Σ(Current Year Price * Base Year Quantity)) / (Σ(Base Year Price * Base Year Quantity))

Laspeyre's Quantity Index (LQI):

LQI measures the change in the quantity of goods produced between two periods using base year
prices.

LQI = (Σ(Current Year Quantity * Base Year Price)) / (Σ(Base Year Quantity * Base Year Price))

Paasche's Price Index (PPI):

PPI measures the change in the total cost of a changing basket of goods between two periods. It uses
the current year's quantities and prices.

PPI = (Σ (Current Year Price * Current Year Quantity)) / (Σ (Base Year Price * Current Year Quantity))

Paasche's Quantity Index (PQI):

PQI measures the change in the quantity of goods produced between two periods using current year
prices.

PQI = (Σ (Current Year Quantity * Current Year Price)) / (Σ (Base Year Quantity * Current Year Price))

Now, let's calculate the indexes for each item:

Rice:

 LPI for Rice in 2022 = (20 * 500) / (15 * 500) = 133.33

 LQI for Rice in 2022 = (600 * 15) / (500 * 15) = 120.00

 PPI for Rice in 2022 = (20 * 600) / (15 * 600) = 133.33

 PQI for Rice in 2022 = (600 * 20) / (500 * 20) = 120.00

Beans:

 LPI for Beans in 2022 = (23 * 590) / (18 * 590) = 122.22

 LQI for Beans in 2022 = (640 * 18) / (590 * 18) = 118.30

 PPI for Beans in 2022 = (23 * 640) / (18 * 640) = 122.22

 PQI for Beans in 2022 = (640 * 23) / (590 * 23) = 120.69

Semovita:

 LPI for Semovita in 2022 = (24 * 450) / (22 * 450) = 109.09

 LQI for Semovita in 2022 = (500 * 22) / (450 * 22) = 100.00

 PPI for Semovita in 2022 = (24 * 500) / (22 * 500) = 109.09

 PQI for Semovita in 2022 = (500 * 24) / (450 * 24) = 110.00

Interpretation:

 Laspeyre's Price Index (LPI) for an item in 2022 measures the percentage change in the cost of a
fixed basket of that item compared to 2021, using 2021 prices and 2022 quantities. For example,
the LPI for Rice in 2022 is 133.33, indicating a 33.33% increase in the cost of the fixed basket of
rice from 2021 to 2022.

 Laspeyre's Quantity Index (LQI) for an item in 2022 measures the percentage change in the
quantity of that item produced compared to 2021, using 2021 prices. The LQI for Rice in 2022 is
120.00, suggesting a 20% increase in rice production using 2021 prices.

 Paasche's Price Index (PPI) for an item in 2022 measures the percentage change in the cost of a
changing basket of that item compared to 2021, using 2022 prices and 2022 quantities. The PPI
for Rice in 2022 is 133.33.
  Paasche's Quantity Index (PQI) for an item in 2022 measures the percentage change in the
quantity of that item produced compared to 2021, using 2022 prices. The PQI for Rice in 2022 is
120.00.

Similar interpretations can be made for Beans and Semovita. These indexes help in analyzing the
changes in prices and quantities for the items and understanding their relative impacts.

Explain five (5) problems involved in the construction of index numbers

Answer:

Problems involved in the construction of index numbers:

Selection of Base Year: Choosing an appropriate base year is crucial, and using an outdated base year
can result in misleading index numbers.

Data Quality: The accuracy and reliability of the data used in index construction are vital. Inaccurate or
incomplete data can lead to incorrect index values.

Weighting Issues: Assigning appropriate weights to items in the index is essential. Inaccurate weighting
can skew the index results.

Substitution Bias: If consumers or producers change their consumption or production patterns over
time, and these changes are not reflected in the index, it can lead to substitution bias.

Quality Changes: Handling changes in the quality of goods and services can be challenging. Failing to
account for quality improvements or deteriorations can result in inaccurate index numbers.