Price index
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A price index is any single number calculated from an array of prices and quantities over a period. Since not all prices and quantities of purchases can be recorded, a representative sample is used instead. Inflation and cost indices are calculated as price indices.
Notable price indices are
The GDP deflator differs from the consumer and producer price indexes in that it does not assume a fixed market basket of goods and services.Calculating price indices
There are two main methods to calculate price indices, the Paasche index (after the German economist Hermann Paasche) and the Laspeyres index (after the German economist Etienne Laspeyres).The Paasche index is
- [\Delta P_P = \frac,]
- [\Delta P_L = \frac,]
The Laspeyres index systematically overstates inflation while the Paasche index understates it. A third index, the Fisher index (after the American economist Irving Fisher), tries to get around this problem. It is calculated as the geometric mean of [\Delta P_P] and [\Delta P_L]:
- [\Delta P_F = \sqrt.]
See also
- inflation
- GDP deflator
- Etienne Laspeyres
- Hermann Paasche
- Irving Fisher
External links
- A discussion of [alternative price indices] at BEA
- PPI [data] from BLS
- Detailed information from BLS about how the PPI is [calculated and applied]
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