Laspeyres

Laspeyres is a method used in economics to calculate the cost of a fixed basket of goods and services over time, primarily to measure inflation. Developed by the Austrian economist Gustav von Laspeyres in the late 19th century, this index is based on the prices of a predetermined set of goods and services that remain constant, while the prices of those items change with market fluctuations. The Laspeyres index is calculated using the formula:

(Σ (Price in current year × Quantity in base year)) / (Σ (Price in base year × Quantity in base year))

This approach assumes that consumers maintain their purchasing patterns, even as prices shift, which contrasts with other indices like the Paasche index, which adjusts quantities based on current market conditions.

A key advantage of the Laspeyres index is its simplicity and stability, as it does not account for substitution effects—meaning it does not reflect changes in consumer behavior due to price variations. This can lead to an overestimation of inflation, as it does not capture the efficiency gains from substituting cheaper alternatives. However, it remains widely used in national accounts and economic reporting due to its straightforward calculation and historical relevance.

Critics argue that the Laspeyres index may underrepresent true economic changes, as it does not reflect shifts in consumer preferences or the introduction of new products. Despite these limitations, it remains a foundational tool in economic analysis, particularly in comparing price levels across different periods for a fixed set of goods.