Question

Question 3 [20]
Consider the following information regarding items in basket of goods for the year 2015 and 2018 Bread, Milk, Sugar, Tea and Milk. (Show all your work)

Product	2015	2015	2018	2018
	Price	Quantity	Price	Quantity
Tea (500g)	8.5	3	10.5	3
Bread	5.5	5	7.5	5
Milk (1 litre)	6.5	5	13.5	3
sugar (2kg)	13.5	5	18.5	4

Compute Laspeyres and Paasche indexes using 2015 as base year, provide interpretation of the indexes

Answer 1

  

SInce Laspeyres index is greater than 100, the individual can afford the same basket of goods in 2018 as he did in 2015.

We can also see that Paasche index is greater than 100 which means that the individual could've afforded the same basket of goods in 2015 as he is in 2018.
Comparing both indices, we can see that since P_L > P_P , there is inflation in the economy.