Cost-of-Living Indexes
Cost-of-living index – Ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period.
Ideal cost-of-living index – Cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base-year prices.
Laspeyres price index – Amount of money at current year prices that an individual requires to purchase a bundle of goods and services chosen in a base year divided by the cost of purchasing the same bundle at base-year prices.
LI = Px2Qx1 + Py2Qy1 / Px1Qx1 + Py2Py1
Px2 and Py2 = current-year prices.
QX1 and QY 1 = base-year quantities
PX 1 and PY 1 = base-year prices
Paasche index – Amount of money at current-year prices that an individual requires to purchase a current bundle of goods and services divided by the cost of purchasing the same bundle in a base year.
PI = PX 2 QX 2+ PY 2 QY 2 / PX 1 QX 2+ PY 1 QY 2
Qx2 and Qy2 = current- year quantities
Fixed-weight index = Cost-of-living index in which the quantities of goods and services remain unchanged.
Chain-weighted price index = Cost-of-living index that accounts for changes in quantities of goods and services.
