Paascheindices

Paascheindices, or Paasche indices, are a family of economic indices used to measure changes over time in prices and quantities, named after the German economist Hermann Paasche. They form part of the standard trio with Laspeyres and Fisher indices for tracking price and expenditure changes.

A Paasche price index is defined for a base period 0 and a current period t using prices p0 and pt and quantities qt from the current period. It is given by PPaasche = sum(pt qt) / sum(p0 qt). The numerator represents the total expenditure on the current basket at current prices, while the denominator represents the cost of purchasing the same current basket at base-period prices. In this sense, the Paasche index reflects how much more or less expensive the current basket would be if evaluated with base-period prices.

Key characteristic is that the weights are defined by current-period quantities, which makes the Paasche index sensitive to substitution effects as consumers switch to cheaper goods. Consequently, the Paasche price index tends to show lower inflation than a Laspeyres index when substitution toward cheaper goods occurs, though results depend on the data and period analyzed.

Paasche indices can also be defined for quantities, using an analogous approach with prices acting as weights. In practice, Paasche indices are often used in conjunction with Laspeyres indices or combined into Fisher indices (the geometric mean of the two) to mitigate biases. They are employed in national accounts, price measurement, and economic analysis to monitor price changes and real activity over time.