/ / Nominal and real indicators: Laspeyres index, its alternatives

# Nominal and real indicators: the Laspeyres index, its alternatives

Which is better - \$ 100 right now or throughyear? Certainly, any sane person will choose the first option. After all, tomorrow is always associated with uncertainty, and the familiar wisdom of childhood teaches that a titmouse is better in hand. But what if in a year we are not expecting 100, but 150 dollars? In order to understand this issue, you need the Laspeyres index and other indicators similar in functionality.

## Real and nominal values

All economic indicators can be divided into three groups:

• Flow values.
• Assets (stocks).
• Indicators of economic conjuncture.

Flow rates reflect the transfer of values ​​inthe process of economic activity from one subject to another, the reserves are their accumulation and use. Therefore, the former are measured by quantity over a period of time, and the latter by a certain moment. However, one must understand that a change in the flows is always associated with a decrease or increase in inventories. The former include, for example, investments and savings, to the second - public debt. The interest rate, the rate of return, the level of inflation are indicators of the economic conjuncture.

## The matching process

The Paasche and Laspeyres indexes are used forcomparison of indicators of different years, expressed in monetary terms. In this case, they talk about real and nominal values. A good example is the gross product. Nominal GDP reflects the value of all final goods produced in the country for the year at current prices. At first glance it seems that an increase in this indicator always indicates an increase in the economy of the state. However, in fact, to understand the ongoing processes can not do without calculating the nominal GDP. And for this you need price indexes. Usually they are singled out by three: Laspeyresa, Paasche and Fischer. All of them are dimensionless quantities, the main function of which is to display how many times and in which direction the nominal index differs from the real one.

## Consumer price index

If this indicator is less than one, thenreal GDP is more than nominal. This adjustment is called inflation. A similar situation is possible against the background of a fall in the general price level. However, it is rare in the modern market economy of most countries of the world. If the Laspeyres index is less than one, then the nominal GDP is deflated. As a result, the latter decreases. Thus, the real gross product is equal to the nominal divided by the Laspeyres index. For the calculation of the latter, a "consumer basket" is used, which consists of a set of goods used by economic subjects. And its composition is not a constant, but varies depending on the methodology of the international organization or the national statistical bureau.

## Calculation of the Laspeyres index

The formula of this indicator includes only twovalues. Both are related to the "consumer basket". Therefore, the accuracy of the indicator is closely related precisely with the methodology for selecting the most appropriate set of products. The Laspeyres index itself is calculated very simply. It is the result of dividing the current value of the basket into it, but in the base year. The latter is also extremely important to choose correctly.

## The GDP deflator

Thus, the Laspeyres index is calculatedon the basis of a set of goods fixed for the base year. He does not take into account the change in the structure of the goods produced. The Laspeyres index does not at all reflect the substitution effect associated with a decrease in wealth due to a rise in price. Therefore, it often overstates the real level of price growth. However, all these shortcomings take into account the Paasche index. It is calculated on the basis of a changing consumer basket. That is, the current set of goods is used, and not the basic one.

This means that the structure is taken into accountproduction. In addition, he takes into account not only a group of consumer goods. The real GDP is equal to the nominal GDP divided by the deflator. Therefore, if the Paasche index is less than one, then, as in the previous case, inflation occurs. More is deflation. However, this indicator has its drawbacks. For example, it often underestimates the growth of the price level due to the fact that it does not take into account the decline in the well-being of the population against the background of a rise in price.

## Fisher's index

The third indicator is considered most appropriatereflecting the real dynamics of the price level. It averages the two previous indexes, eliminating their shortcomings. This indicator is equal to the square root of their product.

## Use in practice

In the USSR, the Paasche index was preferred. However, after its disintegration from the practice in the RF refused. This was due to the need to process too much information, and therefore a lot of costs. The Laspeyres price index has been used in domestic practice since 1991. He is also given preference in foreign statistics.