What is the Fisher Price Index?

The Fisher Price Index, also called the Fisher’s Ideal Price Index, is
a consumer price index (CPI) used to measure the price level of goods
and services over a given period. The Fisher Price Index is a geometric
average of the Laspeyres Price Index and the Paasche Price Index. It is
deemed the “ideal” price index as it corrects the positive price bias in
the Laspeyres Price Index and the negative price bias in the Paasche
Price Index.

Understanding the Index

Similar to other consumer price indices, the Fisher Price Index is used
to measure the price level and cost of living in an economy and to
calculate inflation. The index corrects for the upward bias of the
Laspeyres Price Index and the downward bias of the Paasche Price
Index by taking the geometric average of the two weighted indices.

Formula for the Fisher Price Index

The Fisher Price Index is the geometric average of the Laspeyres and
Paasche Price indices, and the formula is rendered as:

 
 

Where:

 Pi,t is the price of the individual item at the observation period

 Pi,0 is the price of the individual item at the base period
 Qi,t is the quantity of the individual item at the observation
period
 Qi,0 is the quantity of the individual item at the base period

How to Calculate the Fisher Price Index

The index requires a fair amount of computations. The steps taken to

calculate the Index should be as follows:

Step 1: Calculate the Laspeyres Price Index for each period. Remember
that the Laspeyres Price Index uses observation prices and base
quantities in the numerator and base price and base quantities in the
denominator.

Step 2: Calculate the Paasche Price Index for each period. Remember
that the Paasche Price Index uses observation prices and observation
quantities in the numerator and base prices and base quantities in the
denominator.

Step 3: Take the geometric average of the Laspeyres and Paasche Price
Index in each period to determine the Fisher Price Index for the
corresponding period.

Practical Example

The following information regarding the change in prices and quantities

of each individual good in a hypothetical economy is provided.
Determine the Fisher Price Index for Year 0, Year 1, and Year 2, using
Year 0 as the base year.
 

Using Year 0 as the base year, all of the price indexes for that year
should be 100. For completeness, the calculations are shown below:

Year 1
 

Recall that the Laspeyres Price Index uses observation prices and base
quantities in the numerator and base prices and base quantities in the
denominator:

Recall that the Paasche Price Index uses observation price and
observation quantities in the numerator and base price and base
quantities in the denominator:

Year 2

 
Recall that the Laspeyres Price Index uses observation prices and base
quantities in the numerator and base prices and base quantities in the
denominator:

Recall that the Paasche Price Index uses observation prices and
observation quantities in the numerator and base prices and base
quantities in the denominator:

 Below is a summarized table of the Laspeyres, Paasche, and Fisher

Price Index for each year:

 As you can see, the Fisher Index number lies between the Laspeyres
and Paasche Price Index numbers!