The most appropriate average in averaging the price relatives is:
|A. Harmonic mean|
B. Arithmetic mean
C. Geometric mean
The Correct Answer Is:
- C. Geometric mean
When averaging price relatives, geometric means are the most appropriate. Due to the fact that it takes into account all relatives, not just those who share the same surname, this method is more accurate. In addition to considering age, gender, and location, there are many other factors that need to be considered when calculating average prices. When all the prices are summed and divided by the number of data points, a geometric mean is calculated.
As a result of the compounded growth or decline of prices over time, the geometric mean is suitable for averaging price relations. When comparing the price changes of different goods or services over a certain period of time, it considers the multiplicative effects of price changes. The geometric mean represents the average price change over time more accurately than the average price change of goods or services with different initial prices. Using the arithmetic mean instead can overestimate or underestimate the average price change.
If you want to achieve accurate results when averaging price relatives, you must use the right average. The Geometric Mean is one of the most commonly used measures in this context. An nth root of n numbers is called the Geometric Mean. Geometric Means are used to measure the change in price over time for goods and services in price relatives.
The effect of compounding is taken into account when calculating the Geometric Mean. There can be significant differences in magnitude and direction between the prices of different goods and services. For example, a good may experience a 10% increase in price one year, and a 5% decrease the following year, resulting in a combined increase of 4.5%. The Geometric Mean takes these compounded changes into account, providing a more accurate representation of the average price change.
Arithmetic Mean, on the other hand, is calculated by adding all the numbers and dividing by the number of terms. Especially when price changes are not consistent over time, this method can result in overestimation or underestimation of the average price change. The Arithmetic Mean, for example, would show an average increase of 30%, even though the price change in the second year was much higher than the first.
Comparing the price changes of different goods or services with different initial prices can also be done with the Geometric Mean. According to the Arithmetic Mean, if the price of a luxury car increased by 10% over a year, but the price of a basic car increased by 5%, the average increase would be 7.5%. Nevertheless, the Geometric Mean would provide a more accurate picture of the average price change because it takes into account the differences in initial prices.
Averaging price relatives is best performed using the Geometric Mean. By taking into account the difference in initial prices of different goods or services, this approach accounts for the compounded growth or decline of prices over time. When the magnitude of price changes is not consistent over time, the Arithmetic Mean can over or underestimate the average price change.