Question

Fisher's Ideal Formula for calculating index numbers satisfies which tests.
A) Units test
B) Factor Reversal test
C) Both
D) None of above

Answer 1

Unit test requires that the formula for constructing an index number should be free from units of measurements. An index of price when multiplied by an index of quantity, with the same base, given years and commodities should give the true value ratio.

Complete step by step solution:
The Fisher Price Index, also called the Fisher’s Ideal Price Index, is a consumer price index (CPI) used to measure the price level of goods and services over a given period. The Fisher Price Index is a geometric average of the Laspeyres Price Index and the Paasche Price Index. It is deemed the “ideal” price index as it corrects the positive price bias in the Laspeyres Price Index and the negative price bias in the Paasche Price Index.
The Fisher Price Index is the geometric average of the Laspeyres and Paasche Price indices, and the formula is rendered as:
Unit test requires that the formula for constructing an index number should be free from units of measurements. Practically all index numbers except simple unweighted aggregative index numbers satisfy this Fisher's index number.
The other test suggested by Fisher is Factor Reversal Test. According to him, “Just as each formula should permit the interchange of the two times without giving inconsistent results, soit ought to permit interchanging the prices and quantities without giving inconsistent results i.e. the two results multiplied together should give the value ratio.” Fisher index number satisfies Factor Reversal Test.

The correct answer is option (C).

Note:
Unit test requires that the formula for constructing an index number should be free from units of measurements. An index of price when multiplied by an index of quantity, with the same base, given years and commodities should give the true value ratio.