A price index is an index number calculated from the prices and quantities of a period. The most used is the Consumer Price Index, which measures how the spending of an average family evolves.

Contenido

Existen dos métodos principales para calcular índices de precios: el índice Paasche (del economista alemán Hermann Paasche) y el índice de Laspeyres (del economista alemán Ernst Louis Étienne Laspeyres).

Paasche index

The Paasche index has the formula:

being the price index, and the prices and quantities of the item in the initial period or base period, and the same in the subsequent period that we are analyzing. It could be summarized this way:

This index is also known as the GDP deflator:.

Laspeyres index

The Laspeyres index is calculated using the following formula:.

being the price index, and the prices and quantities in the initial period or base period, and the same in the subsequent period that we are analyzing. It could be summarized this way:

The Laspeyres index systematically overvalues ​​inflation, while the Paasche index undervalues ​​it. An important fact is that this index is used to calculate the CPI (consumer price index).

Fisher index

A third index, the Fisher index (by the American economist Irving Fisher), attempts to mitigate the problem of undervaluation or overvaluation of the previous indices, being a kind of intermediate result of the previous two; calculates the Geometric Average of the previous two:.

In practice, countries use various price indices for different objectives:

• - Consumer price index, used to measure the cost of living of an average consumer, based on expenses for consumable products or whose ultimate purpose is household consumption, is frequently used in updating certain subsidies and salaries. Most countries use a Laspeyres type index as CPI.

• - Producer price index, used to measure the production costs faced by companies, based on the costs of raw materials and energy, it is used to estimate the competitive difficulties of companies, for this index a Laspeyres type index is usually used.

• - GDP deflator, used in national accounting, is defined as a Paasche type index.

The historical series for these three indices follow very similar general trends for most countries, with the PPI being somewhat more unstable and the GDP deflator a little more stable (as it is a weighted average).

• - Consumer price index.