Laspeyres price index

Indian Economy glossary

Also called: Laspeyre's index · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"

Meaning

The Laspeyres price index is a weighted aggregative price index. It uses base-period quantities as weights. It asks one question: the base-year basket cost ₹100 then, so what does the same basket cost now?

Formula: Laspeyres = Σp₁q₀ / Σp₀q₀ × 100

Here p₀ and p₁ are base-year and current prices, and q₀ is base-year quantities. It is easy to use because the basket is fixed and the weights stay the same. The same formula is used to build India's Index of Industrial Production (IIP). The IIP applies it to quantities, not prices.

Example

Take four goods from the NCERT table. Their base basket costs Σp₀q₀ = ₹190 at base prices and Σp₁q₀ = ₹257 at current prices. The index is 257/190 × 100 = 135.3, so prices rose 35.3%. (NCERT prints the denominator as 100. The correct figure is 190.)

Don't confuse with

  • Paasche price index: it uses current-period quantities (q₁) as weights, not base-period quantities. The two indices differ only in their weights.
  • Because of substitution bias (people move away from goods whose prices rose fastest), Laspeyres tends to overstate the rise in the cost of living. Paasche tends to understate it.

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