Q.Using the same data as the previous example ($\sum p_0q_0=170,\ \sum p_1q_0=216,\ \sum p_0q_1=190,\ \sum p_1q_1=237$), compute Fisher's ideal price index number, and state why it is called 'ideal'.

Fisher's index is the geometric mean of Laspeyre's and Paasche's indices: $P_{01}(F)=\sqrt{P_{01}(L)\cdot P_{01}(P)} = 180$.

Fisher's ideal price index number is defined as the geometric mean of Laspeyre's index $P_{01}(L)$ and Paasche's index $P_{01}(P)$:

$P_{01}(F) = \sqrt{P_{01}(L)\times P_{01}(P)}$

Substituting the given values $P_{01}(L)=225$ and $P_{01}(P)=144$:

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Dorbish–Bowley's index is the arithmetic mean of Laspeyre's and Paasche's indices: $P_{01}(D\!-\!B)=\dfrac{P_{01}(L)+P_{01}(P)}{2}=\dfrac{90+40}{2}=65$.

Formula. The Dorbish–Bowley price index number is defined as the arithmetic mean of the Laspeyre's index $P_{01}(L)$ and the Paasche's index $P_{01}(P)$: …

A weighted quantity index measures how total quantity has changed from the base year to the current year, giving each commodity a weight $w$. The formula is $Q_{01} = \dfrac{\sum q_1 w}{\sum q_0 w} \times 100$.

In the simple aggregate quantity index we would just add the quantities. But different commodities matter to different degrees, so we attach a weight $w$ (commonly the price, or value) to each item.

For each commodity we form the weighted quantity of the current year, $q_1 w$, and of the base year, $q_0 w$. Summing over all commodities gives $\sum q_1 w$ and $\sum q_0 w$. …

Dorbish–Bowley's index is the average of Laspeyre's and Paasche's indices: $P_{01}^{DB}=\dfrac{1}{2}\left(\dfrac{\sum p_1 q_0}{\sum p_0 q_0} + \dfrac{\sum p_1 q_1}{\sum p_0 q_1}\right)\times 100$ — option (c).

The two base index numbers are:

$\text{Laspeyre's: } P_{01}^{L}=\frac{\sum p_1 q_0}{\sum p_0 q_0}\times 100 \qquad \text{(base-year quantity weights)}$

$\text{Paasche's: } P_{01}^{P}=\frac{\sum p_1 q_1}{\sum p_0 q_1}\times 100 \qquad \text{(current-year quantity weights)}$

Dorbish–Bowley's price index number is defined as their arithmetic mean:

$P_{01}^{DB}=\frac{P_{01}^{L}+P_{01}^{P}}{2}=\frac{\dfrac{\sum p_1 q_0}{\sum p_0 q_0} + \dfrac{\sum p_1 q_1}{\sum p_0 q_1}}{2}\times 100$ …

The weighted aggregate quantity index number is the ratio of the aggregate of weighted current-year quantities to weighted base-year quantities, $\dfrac{\sum q_1 w}{\sum q_0 w}\times 100$. Hence option (C).

For a quantity index number by the weighted aggregate method, each quantity is multiplied by its weight $w$ and the aggregates are compared, with the current year in the numerator and the base year in the denominator:

$Q_{01} = \dfrac{\sum q_1 w}{\sum q_0 w} \times 100$

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Laspeyre's price index weights prices by base-year quantities, $P_{01}^{L} = \dfrac{\sum p_1 q_0}{\sum p_0 q_0}\times 100$; current-year quantities are used by Paasche's index. Hence the statement is False.

The two weighted-aggregate price index numbers differ only in the choice of quantity weights:

$\text{Laspeyre: } P_{01}^{L} = \dfrac{\sum p_1 q_0}{\sum p_0 q_0}\times 100 \quad(\text{base-year quantities } q_0 \text{ as weights})$

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Walsh's price index uses the geometric mean of the two quantities as weight: $P_{01} = \dfrac{\sum p_1 \sqrt{q_0 q_1}}{\sum p_0 \sqrt{q_0 q_1}} \times 100$.

In a weighted aggregate index number, each item's price is weighted by a suitable quantity. Walsh's method takes the weight of each commodity as the geometric mean of the base-year quantity $q_0$ and the current-year quantity $q_1$, i.e. $\sqrt{q_0 q_1}$.

With $p_0, p_1$ the base-year and current-year prices, the current-year prices are aggregated (weighted by $\sqrt{q_0 q_1}$) and divided by the similarly weighted base-year prices:

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The weighted aggregate price index is the ratio of total weighted current-year prices to total weighted base-year prices, times $100$.

Let $p_0$ and $p_1$ be the base-year and current-year prices and $w$ the assigned weights. The Price Index Number by the Weighted Aggregate Method aggregates the weighted prices and compares the current year with the base year:

$P_{01} = \dfrac{\sum p_1 w}{\sum p_0 w}\times 100$.

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Dorbish-Bowley's index is the arithmetic mean of Laspeyre's and Paasche's; the geometric mean (square root of their product) is Fisher's index — so the statement is False.

Let $L$ and $P$ denote Laspeyre's and Paasche's price index numbers.

Dorbish-Bowley's Price Index Number is their arithmetic mean:

$\text{DB} = \dfrac{L + P}{2}$.

Fisher's Ideal Price Index Number is their geometric mean:

$\text{Fisher} = \sqrt{L \cdot P}$.

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Fisher's ideal price index is the geometric mean of the Laspeyres and Paasche indices, which gives $P_{01}(F)=110$.

Fisher's ideal price index number is defined as the geometric mean of the Laspeyres index $P_{01}(L)$ and the Paasche index $P_{01}(P)$:

$P_{01}(F) = \sqrt{P_{01}(L)\times P_{01}(P)}$

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