Question

Which one of the following statements is CORRECT in the context of price indices?

• A. A weighted average of prices of raw materials and semifinished goods, relative to a base-year is known as the Consumer Price Index.
• B. A weighted average of prices of consumer goods, relative to a base-year is known as the Producer Price Index.
• C. The price index that considers the quantity of goods in the base-year as weight is known as the Laspeyres Index.
• D. The price index that considers the quantity of goods in the base-year as weight is known as the Paasche Index.

Hint:

Remember: \[ \text{Laspeyres Index } \rightarrow \text{ Base-year quantities} \] \[ \text{Paasche Index } \rightarrow \text{ Current-year quantities} \]

Answer 1

The Correct Option is C

Step 1: Recall the Consumer Price Index (CPI).
Consumer Price Index measures the weighted average price of consumer goods and services purchased by households relative to a base year.
Thus, option (A) is incorrect because it refers to raw materials and semifinished goods instead of consumer goods.

Step 2: Recall the Producer Price Index (PPI).
Producer Price Index measures changes in prices received by producers for raw materials, intermediate goods, and wholesale products.
It is not based on consumer goods.
Hence, option (B) is incorrect.

Step 3: Recall the Laspeyres Price Index.
The Laspeyres Index uses base-year quantities as weights.
Its formula is
\[ P_L= \frac{\sum p_1q_0}{\sum p_0q_0}\times100 \] where
\[ p_1=\text{current-year prices} \] \[ p_0=\text{base-year prices} \] \[ q_0=\text{base-year quantities} \]
Therefore, option (C) is correct.

Step 4: Recall the Paasche Price Index.
The Paasche Index uses current-year quantities as weights.
Its formula is
\[ P_P= \frac{\sum p_1q_1}{\sum p_0q_1}\times100 \] where \(q_1\) denotes current-year quantities.
Thus, option (D) is incorrect.

Step 5: Final conclusion.
Hence, the correct statement is
\[ \boxed{\text{The Laspeyres Index uses base-year quantities as weights}} \]
Therefore, the correct option is (C).