Discussion
Which of the following is a Dorbish and Bowley's method of constructing an index, where L is Laspeyres and P is Paasche's index ?
Answer: D
The Dorbish and Bowley index is \(\frac{L + P}{2}\).
Laspeyres' index uses base-year quantities as weights and tends to overstate price change, while Paasche's uses current-year quantities and tends to understate it. Dorbish and Bowley proposed taking the arithmetic mean of the two to balance these biases.
Fisher's ideal index is the geometric mean, \(\sqrt{L \times P}\), not \(L \times P\) itself. The sum \(L + P\) and the ratio \(\frac{L}{P}\) are not index formulas.
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