The Laspeyres price index tends to overstate price increases because, as prices change, consumers typically alter their purchasing decisions by selecting fewer products with large price increases while buying more products that show low or no price increases.

What is the main drawback of Laspeyres price index?

The main disadvantages of the index are that it is upward-biased and tends to overstate price increases (compared to other price indices). Therefore, it tends to overestimate price levels and inflation. This is due to: New goods: More expensive new goods that cause an upward bias in prices.

Is the Paasche quantity index likely to overstate or understate growth please explain?

The Paasche price index tends to understate price increases, since it already reflects some of the changes in consumption patterns that occur when consumers respond to price increases—i.e., increased consumption of goods will indicate reduced relative prices. ...