Fisher's Ideal Method

Fisher's Ideal Index is built to combine the strengths of the two methods above rather than choose between them: it is defined as the geometric mean of the Laspeyres and Paasche indices.

By averaging a base-weighted index (Laspeyres, which tends to overstate price rise) with a current-weighted index (Paasche, which tends to understate it), Fisher's method balances out the bias each carries on its own. This balance, together with the fact that it is the only common index that satisfies both the unit test and the time-reversal test (covered later in this chapter), is why it is …