Paasche Index Research Articles

Microeconomic analysis of the main ways of decomposition of the cost index

The article considers a microeconomic analysis of the main options for decomposing the value index into price and quantity change factors, as a result of which it becomes possible to interpret these options in terms of changing the expectations of either the consumer or the producer. The purpose of the study is to show that the Laspeyres, Paasche and Fisher indices have not only an estimated, but also an important content function, reflecting changes in the market expectations of economic agents. To achieve the goal, a comparative analysis of the basic formulas of the concepts of adaptive and rational expectations was carried out, as well as a meaningful analysis of the cost aggregates that are components of the Laspeyres, Paasche and Fisher indices, and a schematic diagram of the formation of adaptive and rational expectations was developed. As a methodological basis for solving the problem, the expectation theory, the analogy method, the index method of factor reversibility, and the minimum basis method were used. It is shown that Laspeyres indices are the essence of changes in adaptive expectations, Paasche indices are changes in rational expectations of producers and consumers, and Fisher indices are a joint change in adaptive and rational expectations of economic agents. It is advisable to interpret one of the main methods of decomposition of the cost index into factors as a “buying” method that meets the expectations of the consumer, another — as a “selling” method that meets the expectations of the manufacturer, a decomposition method, the third — as a “compromise” between market expectations of economic agents.

Macroeconomic instability: inflation

In the period from 1996 to 2021, the consumer price index (CPI) in Ukraine grew at an average annual rate of 112.9%. This is galloping inflation. The share of monetary factors in the formation of the CPI within the analyzed period did not exceed 3%. The share of non-monetary factors was 81.4%. The greatest influence on the formation of the CPI is exerted by the prices of agricultural products and tariffs for housing and communal services, as they account for 77.4% of the variability of the functional feature (CPI). At the same time, the tariffs of housing and communal services account for more than 50% of the impact. Industrial and agricultural prices accounted for almost a third of the functional feature variation (CPI). The identified links and their quantitative characteristics indicate that the Ukrainian economy is dominated by cost inflation. Its main reasons were rising prices for industrial goods, especially energy. The resumption of open large-scale Russian military aggression against Ukraine has become an additional factor in inflation: occupation of territories, destruction of production and infrastructure facilities, rupture of logistics chains, shock growth of consumer demand in regions of refugees concentration, increase in production costs, etc., caused a sharp jump in prices for food, fuel, transport services, etc. The hostilities led to an unplanned increase in the state budget deficit. To cover it, the government sold domestic government bonds. The issue of bonds is accompanied by the issue of money. In the short run, inflationary pressures of money supply are inferior to non-monetary factors. However, as soon as this money enters the consumer market, it will provoke a new round of inflation growth. Keywords: inflation, Paasche index, consumer price index, monetary factors, non-monetary factors, cost inflation, war, budget deficit, money issue.

Does immiserizing growth exist? Evidence from world’s top trading nations

PurposeThis study aims to motivate the reality that experiential investigation of immiserizing growth has not been performed at large. The key objective of the study is to analyse the empirical existence of immiserizing growth in the real world.Design/methodology/approachTheory of revealed preferences has been implemented for welfare movement by using Laspeyres and Paasche quantity index and for empirical estimations, logistic regression has been applied. The study established panel data of the world’s largest trading nations, including the USA, China, France, Germany, UK, Italy, Japan, the Netherland and Canada. Annual time series data for an extensive time period covering from 1981 till 2017 have been used.FindingsFindings of the Laspeyres and Paasche index reveal that out of nine countries immiserizing growth prevails in five nations and those are Italy, Canada, the Netherland, UK and Japan. The results of panel logistic regression verify the significance of terms of trade on immiserizing growth in all included countries. Separate logistic regression has also been performed on all the five countries from which Italy, Canada, the Netherland exhibit significant results.Originality/valueThis study is a pioneer attempt towards the concept of immiserizing growth. Considering the fact that immiserizing growth is viewed by the majority of the scholars as a theoretical notion, this study attempts to investigate analytically the existence of immiserizing growth with real data set. The impact of terms of trade deterioration on the welfare of the world’s largest trading nations has been focused on the research which is in compliance with the concept of Bhagwati (1958).

Index Assessment of Changes in the Balance of Economic Interests and Expectations of the Seller and the Buyer in Market Transactions

The presented study addresses the problem of the correlation between the economic interests of market transaction participants and the market expectations of the seller and the buyer. Innovative balance indices of price and quantity are proposed to be used as a tool for solving this problem.Aim. The study aims to show how the balance indices of price and quantity can be used to achieve a parity compromise in market transactions with a fixed purchase and sale budget, which is the optimal result for the seller and the buyer and ensures the stability of mutually beneficial market relations between economic agents.Tasks. To achieve the set aim, the authors analyze the commodity-money balance of interests and its structure from the perspective of the seller and the buyer; substantiate the need to build a balance of market expectations; assess the possibility of using the index method as a synthetic method to resolve (according to Hegel) contradictions between interests and expectations by combining them.Methods. This study uses methods of mathematical analysis, numerical methods of approximate evaluation of functions, index method, method of analogies, provisions of theories of adaptive and rational expectations.Results. The Laspeyres and Paasche indices can be interpreted as changes in the adaptive and rational expectations of economic agents respectively. It is proved that the balance indices of price and quantity are the coordinates of the point of parity compromise, where “pure” and “mixed” market expectations and economic interests of the seller and the buyer converge.Conclusions. It is established that in market transactions with a fixed budget, the balance of economic interests on a compensatory basis is beneficial for the seller and absolutely not beneficial for the buyer. In order for the balance of interests to be beneficial for both participants of the transaction, it must be viewed through the prism of the balance of market expectations. Balance indices of price and quantity serve as a tool that establishes a connection between the balances of market expectations and economic interests.

On the Statistical Reflection of Long-Term Growth in Agricultural Production

The article presents the results of a study aimed at proving the existence of systematic error in traditional calculations of long-term growth rates of agricultural production based on chain indices of agricultural production. According to the authors, the article also introduces a more accurate assessment of its dynamics with the account to the structure of the relationship between prices and the volume of agricultural production. The paper describes a theoretical model that is a methodological basis for the study and explains the discrepancy in assessing the dynamics of agricultural production using chain indices and indexes at constant prices. It allows establishing differences in the ratios of the Laspeyres, Paasche, and Lowe indices for crop and livestock production, due to factors in the formation of demand and the complex structure of the relationship between the price level and the volume of production. The adequacy of the constructed theoretical model is proved based on aggregated data that eliminated the influence of incompleteness of the initial information. As a result, it was established that livestock production is characterized by time-distributed changes in prices and quantity of products, which makes it possible to assess its dynamics using both chain indices and symmetric indices. It is proved that the dynamics of crop production cannot be adequately described using chain indices, since a positive correlation of prices of the previous period and production volumes of the current period causes an overstatement of the index in comparable prices of the previous year. Based on calculations within the proposed aggregated model, it is proved that the use of constant prices as the Lowe index weights, updated every five years, is an acceptable approximation of the Fisher symmetric index. Application of the indicated methodology for calculating the index to the data on Russian agricultural production by main types of products in 1990-2018 allowed to establish an overstatement of dynamics by 11.9%. The main difference falls on crop production (+ 19.6%), while for livestock - the differences are insignificant (-0.7%).

The clean-up of Chinese manufacturing: Examining the role played by changing techniques of production

We document the recent reductions in the pollution intensity of Chinese manufacturing and utilise the methods developed and applied by Levinson (2009, 2015) and Brunel (2017) to explain the underlying causes of this pollution clean-up. We find that, unlike in the US, compositional changes to the Chinese manufacturing sector have actually increased pollution emissions. This implies that the observed reductions in pollution intensities have been caused by large improvements in techniques of production driven by technology and/or regulations. The dominance of the technique effect in driving down pollution intensities is found whether we measure an ‘indirect’ technique effect or a direct effect using Laspeyres and Paasche indices.

The effect of the implementation of low price medicine policy on medicine price in China: A retrospective study.

In an effort to relieve the pressure of drug shortages, the Chinese government implemented Low-price Medicines (LPM) policy to raise the price cap in July 2014. The purpose of this study is to examine the effect of the implementation of this policy on drug price in China. Price data of 491 LPM, including 218 low-price chemical medicines (LPCM) and 273 low-price traditional Chinese medicines (LPTCM), were collected from 699 hospitals. We used interrupted time series design to identify the variation of monthly Laspeyres Indexes (LI) and Paasche Indexes (PI) for LPM, LPCM, and LPTCM. The result demonstrated that although LPM expenditures increased, the proportion of LPM expenditures accounting for all medicine expenditures fell from 3.6% to 3.2%. After the implementation of LPM policy, there was a significant increasing trend in LPM-PI, LPCM-PI, and LPTCM-PI. The trend in LPM-LI and LPCM-LI was found from descending to rising. However, for LPTCM, the trend in the LI remained to decrease after the policy implementation. Despite the LPM policy had an increasing impact on the LPM drug price, the proportion of LPM expenditures accounting for all medicine expenditures did not increase. More efforts are needed in the future to promote the rational drug use in China.

Price and utilisation differences for statins between four countries

ABSTRACTIntroduction: Australia, England, France and New Zealand use different policies to regulate their medicines market, which can impact on utilisation and price.Objectives: To compare the prices and utilisation of statins in Australia, England, France and New Zealand from 2011 to 2013.Methods: Utilisation of statins in the four countries was compared using Defined Daily Doses (DDD) per 1000 inhabitants per year. Pairwise Laspeyres and Paasche index comparisons were conducted comparing the price and utilisation of statins.Results: The results showed that the price of statins in New Zealand was the cheapest. The price of statins in Australia was most expensive in 2011 and 2012 but France was more expensive in 2013. There were large differences between the Laspeyres index and Paasche index when comparing the price and utilisation of England with Australia and France.Discussion: The policies that regulate the New Zealand and England medicines markets were more effective in reducing the price of expensive statins. The relative utilisation of cheaper statins was greatest in England and had a large effect on the differences between the two index results. The pricing policies in Australia have been only partly effective in reducing the price of statins compared to other countries.

Combining micro and macro data in hedonic price indexes

This paper proposes arithmetic and geometric Paasche quality-adjusted price indexes that combine micro data from the base period with macro data on the averages of asset prices and characteristics at the index period. The suggested indexes have two types of advantages relative to traditional Paasche indexes: (i) simplification and cost reduction of data acquisition and manipulation; and (ii) potentially greater efficiency and robustness to sampling problems. A Monte Carlo simulation study and an empirical application concerning the housing market illustrate some of those advantages.

Comparison of Rotterdam Model versus almost ideal demand system for fish and red meat

ABSTRACTThe Rotterdam and the almost ideal demand systems (AIDS) are often used to model consumer demand system. The present study determined which model performed better in recovering the true elasticities of consumer demand for red meat and fish. For the linearised AIDS model, Stone, Paasche, Laspeyres, and Turnquist price indexes were used. This study also compared the results of the linearised AIDS and the full nonlinear AIDS (NLAIDS) models. According to Lutkepohl, normality test for joint residuals, the linearised AIDS model that used Turnquist price index, was the best system and, based on the Akaike criteria, the linear approximate (LA) AIDS outperformed NLAIDS. The results of the non-nested test for LAAIDS versus Rotterdam showed that LAAIDS is more appropriate for red meat and fish demand in Iran. Price elasticity for fish and red meat showed that they are elastic. Cross elasticity from LAAIDS and NLAIDS showed that fish and red meat are substitutes. Allen-Uzawa elasticity results indicate that the two goods are strong substitutes. Income elasticity indicated that red meat and fish are considered to be luxury goods.

Effects of the National Essential Medicine System in reducing drug prices: an empirical study in four Chinese provinces.

ObjectivesThe rapid increase in drug expenditure has become a major source of public criticism in China. In 2009, the National Essential Medicine System (NEMS) was launched in China to control drug prices and improve access to medicines. This study investigated whether and to what extent the prices of essential medicines were reduced after the introduction of NEMS.MethodsData were obtained from 149 public primary healthcare centers (PHCs) in four Chinese provinces (Shandong, Zhejiang, Anhui and Ningxia) using a facility-based survey. In total, 10,988 essential medicines were investigated. Individual price differences and a price index were used to measure price changes for three different lists: 2009–2010, 2010–2011, and 2009–2011.ResultsIn the comparison between 2009 and 2010, a median decrease of 34.4% [95% confidence interval: 30.4%–39.1%] was observed in drug prices and the number of drug sales increased by 1.5%. The higher the retail price in 2010, the more the drug sales increased compared with 2009 (χ2 = 75.9, p < 0.01). The drug revenues in 100 of the 149 surveyed PHCs decreased by an average of 39%. Where the available data allowed price changes for 2009–2011 to be assessed, drug prices were reduced significantly in 2010, but a modest decrease was seen in 2011. The Laspeyres index was less than 100 and the Paasche index was larger than the Laspeyres index in 2010 and 2011, which indicated that the frequently prescribed drugs usually had higher prices and any price reduction was milder.ConclusionsThe introduction of NEMS in PHCs in China led to price reductions in essential medicines. However, more-expensive drugs were preferred in the postreform period. Most PHCs had less drug revenue and could encounter financing dilemmas after the implementation of NEMS. Policy options such as improving the compensation mechanism and rational use of drugs should be further promoted in PHCs.

Analysis of a Demand System for Unbreaded Frozen Seafood in the United States Using Store-level Scanner Data

This article uses weekly national store-level scanner data acquired from A.C. Nielsen Inc., to analyze demand for 14 unbreaded frozen seafood products in the United States (U.S.). While utilization of scanner data for food demand analyses has become increasingly popular in the U.S., just a few studies of seafood demand have utilized scanner data. We used a log linear version of the Paasche's index with lagged shares as the price index in an Almost Ideal Demand System (AIDS) model and modified the intercept of a standard AIDS model to account for effects of the season and the lagged demand. Own-price, cross-price, and expenditure elasticities vary across species considerably, which highlights the importance of studying consumer demand behavior at disaggregated levels for seafood.JEL Classification Codes: C32, D12, Q21, Q22

A Cost Increase Analysis of Weapon Systems Using the Paache Index: Cases from the German Bundeswehr

Abstract The media and the public often make claims regarding the excessive cost increases in the development and production of major weapon systems such as fighter planes, submarines or tanks. The purpose of this research is in assessing the cost increase of such weapon systems during their procurement periods with the help of the Paasche price index. In contrast to other approaches, which focus upon either the specific situations of single weapon systems or cost increases relative to planned budgets, we compare several projects of military services and their cost increases over time to reveal generalisable trends. For this purpose, we used a framework model that allows for performance and cost comparisons. This paper primarily emphasises the cost perspective by calculating a Paasche index for each chosen project. As a background case for our analysis, we have used the acquisition projects for major weapon systems in Germany. However, the framework model that this study employs is universally applicable. In contrast to the public perception of cost increases, we could not find any clear trend that would indicate that modern weapon systems have a significantly higher (or lower) cost increase than was the case for projects several decades before. To give brief insight into the empirical findings, the cost increase ratios of the Starfighter and Eurofighter jets have the same level, while cost increase ratios of other weapon systems (APC tanks, submarines) differ significantly (to the worse and to the better) over time. Our findings imply that there is no general trend that today the costs for weapon systems increase more/less than some decades ago. This paper calculates data only from the regarded seven cases therefore we could not question the causes for this observation on basis of our sample. However, it appears that, within a specific service or a specific vehicle type (tank, fighter jet, ship/boat), cost increases may be similar over time.

International Trade Price Indices

Export and import price indices are useful instruments in international economics. We document here TradePrices, our database of aggregated and sectoral trade price indices for all countries, computed using unit values given by BACI, the CEPII’s database of international trade at the product-level covering the period 1995-2004. Its rich country dimension allow an international comparison of prices evolutions. We compute “common” Laspeyres and Paasche indices but also “superlative” Fisher and Tornqvist indices, in both chained and fixed-base forms (chained Laspeyres and Paasche are also provided in their geometric form). In a first part, we discuss the characteristics of these different aggregation methods. In particular, we highlight the links between statistical methods and economical assumptions about implicit elasticity of substitution between goods. In a second step we describe the data. An exhaustive sensitivity analysis is done in order to determine the appropriate way to deal with technical difficulties, such as the treatment of measurement errors in bilateral unit values. Finally, this paper provides some stylized facts illustrating the necessity to provide a trade price database allowing international comparison and the usefulness of both aggregated and sectoral trade price indices to study international economics. TradePrices database and SAS programs are freely available online, offering to users the possibility to choose the most accurate index for each particular purpose.

Remarks about the generalizations of the Fisher index

In Fisher's index theory the crossing of formulas and weights was regarded as the most pertinent method to derive an "ideal" index formula. The well known Fisher index is a geometric mean of Laspeyres and Paasche indexes and it satisfies most of the postulates coming from the axiomatic index theory. In this paper we consider the generalized Fisher index. The purpose of the study is to propose and discuss some more general class of indexes including the generalized Fisher index.

Teaching Chain-Weight Real GDP Measures

In 1996, the Bureau of Economic Analysis (BEA) changed the method used to calculate measures of real GDP from a Laspeyres or Paasche index to a Fisher ideal index, also called a chain-weight index. Even though this is a significant change in approach and has resulted in extensive revisions of reported statistics, many authors of intermediate-level textbooks treat this topic casually, if at all. In this article, the author presents two applications in which this topic can be explored more thoroughly, with the help of spreadsheet software. One exercise introduces the concept of the chain-weight index by comparing it to Laspeyres, Paasche, and ideal indexes with the use of utility analysis. The second exercise is a step-by-step process to calculate chain-weight index statistics.

The role of prices in drug expenditure analysis

The objective of this article is to develop and apply several types of price indexes to the analysis of pharmaceutical expenditure to improve the way traditional indexes adjust for innovation in drug supply. The Laspeyres and Paasche indexes in the fixed and linked modalities were used. Price is defined as average expenditure at consumer price per daily defined dose (DDD). The empirical application is restricted to two therapeutic groups, antipsychotics and antidepressants, and to the pharmaceutical expenditure of the Catalan Health Service in the period 1991–1999. The indexes can be computed from the information currently recorded in the administrative procedures of health care insurers, or from sample information provided by regular market surveys. The proposed method allows for controlling the effect of several factors on average pharmaceutical price changes, specifically, the introduction of new drugs that show some degree of therapeutic innovation.

Invariance, price indices and estimation in almost ideal demand systems

Two issues are addressed in this paper. First, we explore the issue of price index invariance in the linearized Almost Ideal demand system. We establish that the Stone index, which lacks invariance, and the recently proposed invariant Laspeyres, Paasche and Tornqvist indices all generate biased and inconsistent estimators. Monte Carlo evidence shows that invariance does not necessarily lead to better estimates of price and income elasticities insofar as the Stone and Paasche indices are unambiguously inferior to the Laspeyres and Tornqvist indices, especially if prices are not strongly positively correlated. Second, we examine the merits of the widely used conditional ML estimator of the non-linear Almost Ideal system in which a prior value is chosen for the “subsistence” parameter. We find that the bias and trace mean square error increases induced by conditional estimation are modest. The choice between the linearized and the non-linear models favors the latter although in some cases linear methods are as good as non-linear.

The measurement of inflation and changes in the cost of living

37 Abstract. The paper first examines the differences between price indexes with fixed quantity· weights designed to measure consumer inflation and cost of living (CoL) indexes which compare the costs of two baskets of goods and services which are not quite the same but yield equal utility. For any specified CoL index, it is always possible to find a fixed weight price index of equal value and it is shown that the requisite quantity weights can be obtained as a linear combination of the actual quantities in both the periods being compared and are therefore more representative of the quantities purchased over the entire length of time spanned by the index. Thus, the fixed weight price index which equals the CoL index is typically a better measure of inflation than a conventional Laspeyres or Paasche index. There is no conflict between measuring inflation and measuring changes in the CoL. The reason why many actual fixed weight consumer prices indexes provide biassed estimates of changes in the CoL is that they are also poor measures of inflation.

On purchasing power parities calculation at the basic heading level

This paper analyses two procedures for calculating Purchasing Power Parities (ppps) at the basic heading level: the first one suggested by UNSO and the second one used by EUROSTAT For the synthesis of the prices of items, UNSO resorts to the characteristicity or asterisk approach and proposes the unweighted geometric mean of the ratios with at least one asterisk, whereas EUROSTAT transforms the above approach into that of equi-characteristicity and introduces pseudo Laspeyres and Paasche indexes and finally Fisher forms which in some sense are weighted geometric means. For the purpose of producing a complete and transitive matrix of ppps, both resort to the EKS procedure, or GEKS, as this paper proposes to rename it. As far as the EUROSTAT procedure is concerned, the formulas for pseudo L and P are analyzed (leaving aside the simple geometric mean suggested by UNSO which gives biased results because of the Gerschenkron effect) and it is shown that the ratios of sums are proper L and P indexes which advantage is that of having a simple and reasonable economic meaning. As for the GEKS iterative procedure, the paper proves that the minimization over the L and P matrices of parities instead of over the matrix of the Fs leads the process to converge in many more cases - therefore giving complete and transitive matrices - than one would obtain through minimization of the matrix of the Fs, which results in a minor loss of information.