Laspeyres index

An unweighted price index is based on a simple sum of the prices of the item prices. This is equivalent to assuming that a consumer purchases equal amounts of all items. It is usually better to use a weighted aggregate price index that weights the price of each item by its importance.

The Laspeyres index uses the quantities of items in the base period as weights. This is equivalent to defining a 'basket' of items typical of usage in the base period; the Laspeyres index is a simple price index based on the price of this 'basket'.

Fish prices in New Zealand

 

Comparison of Simple and Laspeyres indices

Paasche index

The Laspeyres index uses the quantities of items in the base period as weights. In contrast, the Paasche index uses the quantities at the current period as weights.

The Paasche index takes account of variations in consumption patterns over time. For example, there may be a trend for consumers to use margarine instead of butter between 2000 and 2010. The Laspeyres index for dairy products in 2010 is based on out-of-date consumption patterns from 2000 whereas the Paasche index for 2010 is based on the current consumption of the items.

We will not consider the Paasche index further here.

Formula for Laspeyres index