Elementary Indexes For A Consumer Price Index

April 1, 1998

This paper tries to answer the question: What is the proper way to form a price index of an item? The first section of this paper discusses some very simple points about weighted and unweighted arithmetic and geometric mean elementary indexes. Some of these points have been made before (and are worth making again), but others of them have not figured in recent discussions of the elementary index problem. With data on high-frequency price and quantity changes, even the geometric mean gives answers that many would regard counter-intuitive. The second section of the paper discusses some rather complicated points about constructing a (buyers’) cost of living index on high-frequency data gathered from sellers, points that have been grievously neglected in recent literature on elementary price indexes.