Laspeyres and Paasches Method and Time Reversal Test

Laspeyres and Paasches methods are two commonly used price index formulas for measuring changes in the price level of goods and services. They differ in the weights assigned to the base and current period quantities. While Laspeyres method uses base period quantities as weights, Paasches method uses current period quantities as weights.

Time reversal test is a commonly used method for testing the validity of price index formulas. It involves reversing the order of the time periods in the data set and calculating the price index using the same formula. If the two indices obtained from the original and reversed data sets are similar, then the formula is considered valid.

Satisfy/Do not satisfy

The answer to the question is "do not satisfy". Both Laspeyres and Paasches methods fail the time reversal test, which means that they do not satisfy the test for validity.

The reason for this is that these methods are based on fixed weights that do not change over time. This means that they do not take into account the changes in the composition of goods and services that occur over time. As a result, the indices obtained using these methods may not accurately reflect changes in the price level.

Conclusion

In conclusion, while Laspeyres and Paasches methods are useful for measuring changes in the price level of goods and services, they do not satisfy the time reversal test for validity. As such, it is important to use caution when relying on these methods to make economic decisions. Other methods, such as Fisher's ideal index, may be more appropriate in certain contexts.