Paasche’s method

The paasche price index is a weighted aggregate price index in which the weights are determined by quantities in the given year. The formula for constructing the index is:

Steps.
(i) Multiply current year prices various commodities with current year weights and obtains ∑p₁q₁.
(ii) Multiply the base year prices of various commodities with current year weights and obtain ∑p₀q₁.
(iii) Divided ∑p₁q₁ by ∑p₀q₁ and multiply the quotient by 100.

In general, this formula answers the question: “What would be the value of the given period list of goods when values at base period prices?”

The difficulty in computing the Paasche index in practice in that revised weighted, or quantities, must be computed each year or each period, adding to the data collections expenses in the preparation of the index. For this reason, the Paasche index is not used frequently in practice where the number of commodities is large.

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