Weighted index
Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"
Meaning
A weighted index is an index number that gives each item a weight based on how important it is. Weights can be quantities bought or shares of total spending. Without weights, a price rise in salt would count as much as a price rise in rice. Most real indices are weighted, including the CPI, WPI and IIP.
Example
Four goods have price relatives of 200, 120, 125 and 150. Their simple (unweighted) average is 149. Weight them by spending shares of 40, 30, 20 and 10 and the index becomes 156. It is higher because item A, the heaviest item, doubled in price. In India's CPI-Combined (2012 series), food and beverages carried a weight of 45.86, so food prices move headline inflation strongly.
Don't confuse with
- Simple (unweighted) index: it treats every item equally. Examples are the simple aggregative index and the simple average of price relatives.
Related concepts
- Index number
- Price index
- Quantity index
- Simple aggregative price index
- Weighted aggregative price index
- Laspeyres price index
- Paasche price index
- Price relative
- Method of averaging relatives
- Weighted index of price relatives