The Fisher Price Index (FPI) is a method of measuring inflation that takes into account both the change in the price level of a basket of goods and services, as well as the relative change in the quantities of those goods and services consumed.
fisher price index formula
The formula for the Fisher Price Index is as follows:
FPI = (P1/P0) x (Q1/Q0) – 1
Where:
- P1 is the current price level
- P0 is the base price level
- Q1 is the current quantity of goods and services consumed
- Q0 is the base quantity of goods and services consumed
The Fisher Price Index is based on the idea that changes in the relative quantities of goods and services consumed can affect the overall level of prices, so it takes into account both the change in prices and the change in quantities consumed. This index is particularly useful in cases where the basket of goods and services consumed changes over time, such as when new products are introduced or when consumer preferences change.
It is important to note that the Fisher Price Index is not as widely used as other inflation measures like the Consumer Price Index (CPI) or the Producer Price Index (PPI) because it is more complex to calculate and requires more data.
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.
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.