An Economic Approach to Price-Index Bias.

Abstract This article discusses several means of achieving the weighting of the prices of all the commodities which are used to define the price index. In recent years, interest in price-level adjustments in accounting has increased and has become an important topic in instruction in accounting theory. Frequently, already existing price indexes will be employed in carrying out price level adjustments. Sometimes, however, construction of an index will be necessary. Any utilization of a price index should be accompanied by an understanding of the inherent characteristics of the formula which defines the index. Economic analyses may be a useful approach to this task. In particular, the proof demonstrated above may be useful in presenting these concepts in the classroom. The construction of a price index requires a weighting of the prices of all the commodities which are used to define the price index. But, for the same reason as in the case of the Paasche Index, this true index cannot be determined.