Laspeyres and Paasche Index

The Laspeyres and Paasche indices are the two foundational bilateral index numbers used to measure how a basket of prices (or quantities) changes between a base period and a current period. The Laspeyres index weights price changes by base-period quantities — it asks what the original basket costs now relative to then — while the Paasche index weights by current-period quantities, asking what the current basket costs now relative to then. They differ because consumers substitute away from goods whose relative prices rise, and this difference defines the well-known substitution bias: the Laspeyres index tends to overstate, and the Paasche index to understate, the true cost-of-living change, bracketing it between them.