Construction of an Index Number

The principles of constructing an index number are illustrated through the price index. Consider four commodities whose base- and current-period prices differ, giving a different percentage change for each:

If every item had changed by the same percentage, one figure would describe the change. Because they differ — and in a real market the number of commodities is large — reporting each item's change is confusing. A price index collapses all these movements into a single number.

There are two methods of construction: …