price index

price index

Measure of change in a set of prices, consisting of a series of numbers arranged so that a comparison of the values for any two periods or places will show the change in prices between periods or the difference in prices between places. Price indexes were first developed to measure changes in the cost of living in order to determine the wage increases necessary to maintain a constant standard of living. There are two basic types. Laspeyres-type indexes define a market basket of goods in a base period, then use the prices for those goods to examine change over space and time. In its simplest form, this is simply the ratio of what those goods cost today to what they cost in the base period. The two most familiar indexes of this type are the consumer price index (CPI) and the producer price index (PPI). The CPI measures changes in retail prices in such component parts as food, clothing, and shelter. The PPI (formerly called the wholesale price index) measures changes in the prices charged by manufacturers and wholesalers. Paasche-type indexes define a market basket of goods in the current period, then use the prices of those goods from past periods. The most familiar index of this type is the GDP deflator, used in the U.S. in the national income accounting to differentiate amounts in constant dollars from those in current dollars.