Simple aggregative price index

Indian Economy glossary

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

Meaning

The simple aggregative price index is the simplest price index. Add up the current prices of all goods, divide by the sum of their base prices, and multiply by 100.

Formula: ΣP₁ / ΣP₀ × 100

It is of limited use for two reasons:

  • Prices are quoted in different units (per kg, per litre), so adding them together can mislead.
  • It is unweighted. Every item counts equally, even though food takes a much bigger share of spending than salt.

Example

Four goods cost ₹2, ₹5, ₹4 and ₹2 in the base year and ₹4, ₹6, ₹5 and ₹3 now. The index is (4+6+5+3)/(2+5+4+2) × 100 = 18/13 × 100 = 138.5, so prices rose 38.5%.

Don't confuse with

  • Weighted aggregative price index: it multiplies each price by a quantity weight (Σp₁q/Σp₀q × 100), so goods people buy more of count for more.

Related concepts

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