Author: Sarthak Bhalerao
Table of Contents
- What is the Fisher-Price Index?
- Understanding the Index
- How to calculate the Fisher-Price Index?
What is the Fisher-Price Index?
The Fisher-Price Index, more commonly known as the Fisher Ideal Price Index, is a consumer price index used to measure the increase in the prices of goods and services over a period of time. The index is calculated as the geometric mean of the Laspeyres Index and the Paasche Price Index. It corrects the positive price bias in the Laspeyres Price Index and the negative price bias in the Paasche Price Index. Before going further into this, let us understand what the Laspeyres Index and the Paasche Price Index mean.
Laspeyres Index is a method of calculating the consumer price index by measuring the change in the price of the basket of goods to the base year. This index usually takes 100 as the base year for its analysis. An index that is greater than 100 implies that there is a rise in prices and when the index is less than 100, it implies that the prices have fallen.
The Paasche price index is a method to calculate inflation by measuring the price in a commodity as compared to the base year. This index uses a base year of 100 for the analysis as well. If the index is greater than 100, it signifies the inflation impact. If the index is less than 100, it implies Deflation.
Understanding the Index
The Fisher-Price Index is very similar to other consumer price indices. The Fisher-price index is used for measuring the price level and the cost of living in any economy and it is used to calculate inflation as well. The index takes the geometric average of the Laspeyres Index and Paasche Price Index by correct the upward bias of the Laspeyres price index and the downward bias of the Paasche price index.
The Fisher-price index, as mentioned above, is the geometric average of the two weighted indices. This formula for calculating the Fisher-price index is as follows:
- Pi,t is the price of the individual item at the observation period
- Pi, 0 is the price of the individual item at the base period
- Qi,t is the quantity of the individual item at the observation period
- Qi, 0 is the quantity of the individual item at the base period.
How to Calculate the Fisher-Price Index
A fair number of computations are required for this index. The steps are to be followed while calculating the Index:
STEP 1: Calculate the Laspeyres Price Index for each period. You should note that the Laspeyres price index used observation prices and base quantities in the numerator and base price and base quantities in the denominator.
STEP 2: Calculate the Paasche Price Index for each period. Remember that the Paasche Price Index uses observation prices and observation quantities in the numerator and base prices and base quantities in the denominator.
STEP 3: The last step is to take the geometric average of the Laspeyres and Paasche Price index in each period to determine the Fisher-price index for the corresponding period.