PAASCHE INDEX

index developed by German economist Hermann Paasche for measuring current price or quantity levels relative to those of a selected base period. It differs from the Laspeyres index (q.v.) in that it uses current-period weights; that is, in computing the index, a commodity's price relative (ratio of current price to base-period price) is weighted by the commodity's relative importance to all purchases in the current period. The index is arrived at by taking the ratio of the total cost of purchasing a specified bundle of current-period commodities valued at current prices to the value of those same commodities at base-period prices and multiplying by 100. The Paasche price index tends to understate price increases, since it already reflects some of the change in consumption patterns with which consumers respond to price increasesi.e., increased consumption of goods that show little or no price change.