Laspeyres Index: An Indicator of Price Changes for a Fixed Basket
The Laspeyres Index uses the quantities of goods or assets in the base period as fixed weights and compares the cost of the same basket across different periods to observe changes in the overall price level relative to the base period.
Basic Principles
The Laspeyres Index first selects a base period and records the quantities and prices of each good or service in the basket. It then keeps the base-period quantities unchanged and calculates the cost using current-period prices. Because it compares the same quantities, the index can directly reflect whether the overall price of this fixed basket has increased, decreased, or remained unchanged.
Formula and Interpretation
The formula is ∑(Pt×Q0)÷∑(P0×Q0)×100, where Pt is the current-period price, P0 is the base-period price, and Q0 is the base-period quantity. A result above 100 indicates that the cost has increased relative to the base period; a result below 100 indicates a decrease; and a result equal to 100 indicates that the cost has not changed.
Example Calculation
If the base-period purchase consists of 10 apples at a unit price of 1 USD and 5 loaves of bread at a unit price of 2 USD, the basket cost is 20 USD. If the current prices become 1.50 USD and 2.50 USD, respectively, calculating with the original quantities gives a cost of 27.5 USD, so the index is 137.5, indicating that the cost has increased by 37.5%。
Applications and Limitations
This index is commonly used to observe the cost of living and inflation or deflation. It can also use a fixed-quantity basket of cryptocurrencies to measure aggregate price changes. When using it, note that it always applies the base-period quantities and therefore cannot directly reflect subsequent changes in holdings, consumption substitution, or basket composition.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/laspeyres-index
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