Laspeyres Index
Beginner
What Is a Laspeyres Index?
The Laspeyres index is a tool used in economics to track changes in the cost of a fixed basket of goods and services. It helps us understand how prices increase or decrease over time, giving us a view of inflation or deflation. The Laspeyres index is commonly used to calculate consumer price indices (CPI), which track the cost of living.
How Does a Laspeyres Index Work?
The Laspeyres index uses a set of goods and services from a base period (a specific starting time). These goods and services have quantities and prices recorded at the base period. The index then compares the cost of these same items in a later period, using the same quantities but updated prices.
Formula
The formula for the Laspeyres index is:
Laspeyres Index = ∑(Pt⋅Q0) / ∑(P0⋅Q0) * 100, where:
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∑ indicates the sum of the items that stand after it.
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Pt is the price of a good or service in the current period.
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P0 is the price of a good or service in the base period.
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Q0 is the quantity of a good or service in the base period.