Laspeyres Price Index

The Laspeyres price index is defined as an arithmetic average of the price relatives using the values of an earlier period, 0, as weights:



Thus, the Laspeyres price index keeps the quantities fixed for some period in the past, 0. In its simplest form it is a ratio of what it costs to purchase the same set of goods and services today compared to a specific previous period, 0. The Laspeyres index is estimated using a price ratio – p_t/p₀ – multiplied by a previous period expenditure share (weight) – w_i,0.

The Laspeyres index assumes that no product substitution takes place, thus, represents the upper boundary of ‘true’ inflation.
The Laspeyres index fails the time reversal, the circularity as well as the factor reversal tests. However, the proportionality, the commensurability, and the monotonicity tests hold.