Definition of Price Index

fter yesterday we discussed the formula for calculating the cost of goods manufactured , this time we will discuss the meaning of the price index and its types, functions and methods of calculating the price index. The following is the explanation …

Table of contents :

  • Definition of Price Index
  • Types of Price Indices
    • Consumer Price Index (CPI)
    • Producer Price Index (IHP)
    • Price Index to be Paid and Received by Farmers
    • Implicit Price Index (GNP Deflator)
  • Price Index Calculation Purpose
  • Price Index Calculation Function
  • Method of Calculating Price Index Increase
    • Unweighted Index Score Method
      • Price Index Number (P = Price)
      • Value Index Number (V = Value)
      • Quantity Index Number Method (Q = Quantity)
    • Weighted Index Figures
        • Simple Aggressive Method
        • Paasche Method
        • Laspeyres Method
        • The Drobisch and Bowley Method
        • Irving Fisher’s Method
        • Marshal Edgewart’s Method
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Definition of Price Index

The price index is a comparison between the average price of an item in the calculated year and the average price for the base year.

The definition of a price index is a measure that shows the various changes that have occurred in prices over time.

In this price index, the base year commonly used is the year that is used as a benchmark in calculating the price index.

Meanwhile, the base year chosen must be a year in which economic conditions are stable and good and not too long with the year that will be calculated later.

Types of Price Indices

1. Consumer Price Index (CPI)

The Consumer Price Index is an index that explains changes in the price of a good or service purchased by a consumer.

The consumer price index contains data on the price of goods or services collected from various regions / cities.

This data illustrates the behavior of consumer families in terms of spending their income.


Also Read:   Understanding Posts


This data is taken from four groups, namely housing, food, clothing and various other goods or services.

The consumer price index can be used to measure the level of a country. In addition, it can also be the basis for determining adjustments to salaries, wages, pension payments, and other types of contracts.

2. Producer Price Index (IHP)

The producer price index or also known as the wholesaler price index. Producer Price Index is a comparison of the price of goods and / or services purchased by producers at a certain time. This includes raw materials and semi-finished materials.

The types of goods compared to the producer price index are grouped into several sectors and each sector for sub-sectors.

3. Price Index to be Paid and Received by Farmers

The price index paid by farmers is a price index that describes the price development of farmer household needs.

both household consumption needs and agricultural production processes such as fertilizers, seeds, and medicines.

The price index paid by farmers is influenced by government policies, trade politics, prices for food, housing, clothing, various types of goods and also the value of money.

4.Implicit Price Index (GNP Deflator)

The implicit price index (Gross National Product Deflator) functions to determine the rate of inflation over time by comparing the nominal Gross National Product in a given year with the real Gross National Product.

Price Index Calculation Purpose

The purpose of calculating the price index is to determine the size of change in economic variables as a measure of a country’s economic condition expressed as a percentage.

The price index plays an important role in determining the government’s economic policy in dealing with inflation.

Price Index Calculation Function

  • Price index as a basis for economic policy making
  • Price index as the basis for determining pricing policy
  • Price index as a tool to measure the level of economic progress
  • Price index as a tool for investigating driving factors
  • The price index can be used by traders in determining the selling price of a product.


Also Read:   Cost Calculations


Method of Calculating Price Index Increase

1. Unweighted Index Score Method

Unweighted price index figures include value, price and quantity indexes.

·         Price Index Number (P = Price)

Information :

Pn = price calculated for the index number

IA = unweighted price index

Po = price in the base year

·         Value Index Number (V = Value)


Vn = value index number

IA = value calculated for the index number

Vo = value in base year

·         Quantity Index Number Method (Q = Quantity)

Information :

Qn = quantity for which the index number will be calculated

IA = index of quantity that will not be weighed

Q0 = quantity on base year

2. Weighted Index Figures

This calculation method can be carried out by various methods:

·         Simple Aggressive Method


Po = price in the base year

Pn = value for which the index number is calculated

IA = weighted price index

W = weighting factor

·         Paasche Method

The meaning of this method is for the index weighted by the weighting factor, the quantity of tofu (the year the index is calculated) / Qn.

Information :

IP = paasche index number

Pn = year price for which the index is calculated

Qn = quantity of years for which the index number is calculated

Po = price in base year

·         Laspeyres Method

In this method, the index numbers are weighted by using a weighting factor for the quantity of the base year / Qo.

Information :

Pn = price in the year for which the index number is calculated

Po = price in base year

IL = laspeyres index number

Qo = quantity in the base year

·         The Drobisch and Bowley Method

Information :

IL = Laspeyres index number

IP = Pasche index number

D = drobich index number

·         Irving Fisher’s Method

This method is the ideal method. The formula is as follows:

This method calculates the paasche and laspeyres indices, so the fisher index can be calculated as follows.


Also Read:   Example of Procedure Text


There was an increase of 103.00% in 2004

·         Marshal Edgewart’s Method

This method is a weighted index number which is calculated on the basis of the year quantity and the basic quantity that is the greatest, then transfers it to the base year / year price


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