WORKING PAPER NO: 96/1
CHOOSING A PRICE INDEX FORMULA, MAY 1996
The choice of price index formula can significantly influence the measurement of price change. This working paper contains a survey of the literature relating to the choice of price index formula.
The properties of the most commonly used formulae have been examined with special emphasis on the benefits of using chained indexes when circumstances permit. The focus in this paper is on the choice of price index formula at the macro-level. However, the choice of formula at the most disaggregated level is also crucial.
The limited evidence as to the quantitative impact of using alternative formulae motivated an examination of this issue in the context of measuring price change for tradable and non-tradable goods in Australia. The results indicate that alternative formulae may lead to quite divergent measures of price change. The theoretical and empirical evidence presented in this paper emphasise the importance of considering the choice of index formula when compiling or using price indexes.
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