Paasche price index

Indian Economy glossary

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

Meaning

The Paasche price index is a weighted aggregative price index. It uses current-period quantities as weights. It asks: what does today's basket cost now, compared with what it would have cost at base-year prices?

Formula: Paasche = Σp₁q₁ / Σp₀q₁ × 100

Here q₁ is current quantities. The weights change every period, so a new basket must be surveyed each time. That makes the index harder to compile.

Example

Using the NCERT four-goods data, today's basket costs Σp₁q₁ = ₹185 at current prices and Σp₀q₁ = ₹140 at base prices. The index is 185/140 × 100 = 132.1, a price rise of 32.1%. For the same data, the Laspeyres index is 135.3.

Don't confuse with

  • Laspeyres price index: it uses base-period quantities (q₀). Paasche tends to understate the rise in the cost of living and Laspeyres tends to overstate it. Fisher's ideal index is the geometric mean of the two.
  • GDP deflator: its weights also come from current production, so it behaves like a Paasche index. But it is implicit: nobody chooses a separate basket for it.

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