What are the two different ways of looking at the index of the general price level?

The index of the general price level is a measure of the overall level of prices in an economy for a basket of goods and services. It is used to track the inflation rate, which is the change in the general price level over time.

The Laspeyres Index is one way of looking at the index of the general price level. It is calculated by using the base-year quantities and current-year prices. The formula for the Laspeyres Index is as follows: \[ L = \frac{\sum_{i=1}^{n} P_{i,1} Q_{i,0}}{\sum_{i=1}^{n} P_{i,0} Q_{i,0}} \cdot 100 \] Where: - \(L\) is the Laspeyres Index - \(P_{i,1}\) is the current year price of good \(i\) - \(Q_{i,0}\) is the base year quantity of good \(i\) - \(P_{i,0}\) is the base year price of good \(i\) - \(n\) is the number of goods in the basket The Laspeyres Index measures the relative change in the cost of purchasing the base-year basket of goods at current-year prices.

The Paasche Index is another way to look at the index of the general price level. It uses the current-year quantities and current-year prices. The formula for the Paasche Index is as follows: \[ P = \frac{\sum_{i=1}^{n} P_{i,1} Q_{i,1}}{\sum_{i=1}^{n} P_{i,0} Q_{i,1}} \cdot 100 \] Where: - \(P\) is the Paasche Index - \(P_{i,1}\) is the current year price of good \(i\) - \(Q_{i,1}\) is the current year quantity of good \(i\) - \(P_{i,0}\) is the base year price of good \(i\) - \(n\) is the number of goods in the basket The Paasche Index measures the relative change in the cost of purchasing the current-year basket of goods at current-year prices. To summarize, the two different ways of looking at the index of the general price level are the Laspeyres Index, which uses base-year quantities, and the Paasche Index, which uses current-year quantities. Both indexes use current-year prices.