Data for fuel oil and gasoline purchased at wholesale prices for 2006 and 2010 are shown in the following table. What is your interpretation of the Laspeyres price index?

Question

Data for fuel oil and gasoline purchased at wholesale prices for 2006 and 2010 are shown in the following table.  What is your interpretation of the Laspeyres price index?

Quizplus · Accepted Answer

The Laspeyres price index measures the change in price of a fixed basket of goods over time. In this case, we are comparing the prices of fuel oil and gasoline in 2006 and 2010 using the 2006 quantities as the fixed basket. To calculate the Laspeyres price index, we first calculate the total cost of the basket in both years using the 2006 prices and the actual quantities purchased in each year.

In 2006, the total cost of the basket was 4000 x $1.42 + 3000 x $1.53 = $11,530. 
In 2010, the total cost of the same basket was 4000 x $1.67 + 3000 x $1.95 = $14,840.

The Laspeyres price index is then calculated as (2010 total cost / 2006 total cost) x 100%, or (14,840 / 11,530) x 100% = 128.71%.

This means that the cost of the fixed basket increased by 28.71% between 2006 and 2010, or 16.71% annually (if we assume a constant rate of increase). Therefore, the correct answer is C, value rose 16.71%.

Data for Fuel Oil and Gasoline Purchased at Wholesale Prices