Time Reversal Test and Fisher's Index Number

The time reversal test is a statistical method used to test the accuracy and validity of price indices. It is used to determine whether the index number formula used to calculate a particular price index is consistent with economic theory. The test involves reversing the base and current periods of the index and comparing the resulting values. If the new index number is the reciprocal of the original index number, then the index formula is said to pass the time reversal test.

Fisher's Index Number

Fisher's index number is a formula used to calculate a price index. It is a weighted geometric mean of the Laspeyres and Paasche indices. Fisher's index is considered to be more accurate and reliable than the Laspeyres and Paasche indices because it satisfies the time reversal test.

Fisher's Index Number and Time Reversal Test

Fisher's index number satisfies the time reversal test because it is a weighted geometric mean of the Laspeyres and Paasche indices. When the time reversal test is applied to Fisher's index number, the resulting value is the reciprocal of the original index number. This demonstrates that the index formula is consistent with economic theory and is therefore considered to be valid and accurate.

Conclusion

In conclusion, Fisher's index number is a formula used to calculate a price index that satisfies the time reversal test. This means that the index formula is consistent with economic theory and is considered to be valid and accurate. Fisher's index is widely used in economic analysis and is considered to be one of the most reliable and accurate measures of price change.