by manufacturers, is subtracted from the change in the observed price paid by consumers.
Fisher ideal index
A superlative index derived as the geometric mean (the square root of the product) of the Paasche index and the Laspeyres index.
An index constructed as the ratio of the cost of purchasing a basket of goods and services at the prices of one period (or in one location) to the cost of purchasing that same basket at the prices of a subsequent period (or different location). The set of weights assigned to the prices of items in the basket remains the same in each period (or location).
Geometric mean formula
A method for combining price quotes, currently used in the CPI for about 61 percent (by weight) of basic item indexes, that uses a set of fixed-expenditure (as opposed to quantity) proportions as weights for averaging individual prices within a basic index. Fixing relative expenditure proportions implies that customers substitute among specific items (in response to changing prices) in such a way that the share of expenditure on each item category remains constant.
Hedonic quality adjustment
A method that uses regression technique to separate out the effect of changed item quality on its observed price by establishing a relationship between a good’s characteristics and its price. See direct hedonic method, indirect hedonic method.
A theoretical assumption positing that a consumer ranks different bundles of goods the same no matter what her level of living so that the rate at which a person is prepared to trade one good for another is independent of whether the person is rich or poor; it also implies that, as people become better off, they simply scale up their purchases without changing the pattern of consumption.
Index (chain) drift
The divergence between a chained index and a fixed-weight index caused by the linking of indexes with different strata weights.
A formula that dictates the exact way in which prices and expenditure shares are combined to calculate a price index.
Indirect hedonic method
In hedonic quality adjustment, a technique that involves adjusting, post hoc, the observed price difference between an outgoing item and a replacement item based on the portion of the price change attributable to a changed characteristic. The magnitude of the adjustment is determined by