Fishers Ideal Index Number: Explanation

Fisher's Ideal Index Number is a method used to determine the average price changes in a set of goods or services over a given period. It is a weighted arithmetic mean of price relatives, where the weights are the expenditure shares of the various items.

Unit Test

The unit test checks if the index number remains the same if the unit of measurement changes. Fisher's Ideal Index Number does not satisfy the unit test because it is sensitive to the unit of measurement. For example, if the price of a commodity is measured in kilograms, and the quantity is measured in pounds, the index number will be different.

Time Reversal Test

The time reversal test checks if the index number remains the same when the time period is reversed. Fisher's Ideal Index Number does not satisfy the time reversal test because it is not time-reversible. The index number changes when the base period and the current period are reversed.

Circular Test

The circular test checks if the index number remains the same when the base and current period are interchanged. Fisher's Ideal Index Number satisfies the circular test. The index number remains the same when the base and current period are interchanged.

Factor Reversal Test

The factor reversal test checks if the index number remains the same when the price and quantity are reversed. Fisher's Ideal Index Number does not satisfy the factor reversal test because it is not factor-reversible. The index number changes when the price and quantity are reversed.

Conclusion

In conclusion, Fisher's Ideal Index Number is a useful method for calculating the average price changes in a set of goods or services over a given period. However, it does not satisfy the unit test and time reversal test, making it sensitive to the unit of measurement and not time-reversible. It satisfies the circular test but does not satisfy the factor reversal test.

Circular test