Comparisons of Index Numbers: An Application to Sawmills and Planing Mills Industry of U.S.

The purpose of this paper is to investigate index numbers by conducting various comparisons among the widely used index formulas. The comparison is considered in three ways; 1) divergences in the magnitudes of index numbers due to the use of different formulas (Laspeyres, Paasche, Fisher, and Tornqvist); 2) the effect of selection of base year (fixed-year base vs. chain-type); 3) the degree of approximation of indirect to direct quantity index. The empirical application is to sawmills and planing mills industry of U.S. using a national time series data covering years of 1948-2000. The results show that the differences between Laspeyres and Paasche index can be substantial in some cases while the difference between Fisher and Tornqvist index is minimal. We also confirm that the selection of base year can cause significant divergences, especially when the variables undergo rapid price or quantity changes over time. We find that indirect quantity index approximates direct quantity index reasonably well in U.S. sawmill industry.