The factor reversal test is satisfied bya)Simple aggregative index num...
The factor reversal test requires that multiplying a price index and a volume index of the same type should be equal to the proportionate change in the current values (e.g. the “Fisher Ideal” price and volume indexes satisfy this test, unlike either the Paasche or Laspeyres indexes).
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The factor reversal test is satisfied bya)Simple aggregative index num...
The factor reversal test is a criterion used to determine whether an index number formula satisfies the time reversal property. It tests whether the index number formula yields the same result when the roles of the base and comparison periods are reversed. In other words, if we switch the base period and the comparison period, the index number should remain the same.
The factor reversal test is satisfied by a Simple aggregative index number.
Here is an explanation of why the factor reversal test is satisfied by a Simple aggregative index number:
Factor Reversal Test:
- The factor reversal test is a property that an index number formula should satisfy.
- It checks whether switching the base and comparison periods leads to the same index number.
Simple Aggregative Index Number:
- A simple aggregative index number is calculated by summing the prices or quantities of the items in the base period and comparison period separately and then taking the ratio of the two sums.
- The formula for a simple aggregative index number is: Index = (Sum of prices/quantities in comparison period) / (Sum of prices/quantities in base period)
Satisfaction of the Factor Reversal Test:
- When the base and comparison periods are reversed, the formula for a simple aggregative index number remains the same.
- Let's assume the base period is period A and the comparison period is period B.
- In the formula, we sum the prices or quantities in period B and divide it by the sum in period A.
- If we reverse the roles, making period B the base period and period A the comparison period, we would still sum the prices or quantities in period A and divide it by the sum in period B.
- The ratio remains the same because we are essentially calculating the same index number, just with the roles of the periods reversed.
Conclusion:
- Based on the explanation above, it is clear that a simple aggregative index number satisfies the factor reversal test.
- Therefore, the correct answer to the question is option 'A': Simple aggregative index number.
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