Time Reversal Test Not Satisfied by Laspeyres and Paasche Method

The Time Reversal Test is a test that determines whether an index number formula can be used to calculate both the current prices and the base year prices. If the test is satisfied, the index formula is said to be reversible, and it can be used to calculate both current and base year prices. However, if the test is not satisfied, the index formula is said to be irreversal, and it cannot be used to calculate both current and base year prices.

Laspeyres and Paasche Method

Laspeyres and Paasche Method are two commonly used index number formulas for calculating price indexes. However, it is important to note that neither of these methods satisfies the Time Reversal Test.

Laspeyres Method

The Laspeyres Method is a formula that uses fixed base year quantities to calculate the price index. This means that the quantities of goods and services used in the calculation are based on a specific year, and they do not change over time.

Paasche Method

The Paasche Method, on the other hand, is a formula that uses current year quantities to calculate the price index. This means that the quantities of goods and services used in the calculation are based on the current year, and they can change over time.

Why Laspeyres and Paasche Method Fail the Time Reversal Test

Both Laspeyres and Paasche Method fail the Time Reversal Test because they use fixed base year quantities or current year quantities in their calculations. As a result, they cannot be used to calculate both current and base year prices.

Conclusion

In conclusion, Laspeyres and Paasche Method are two commonly used index number formulas that do not satisfy the Time Reversal Test. This means that they cannot be used to calculate both current and base year prices.

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