Chain price index measures changes in prices over time without using a fixed reference point, while a standard price index uses an initial figure as the base period. The chain price index solves the problem of changing contents of the “basket” of goods and services and allows for easier at-a-glance reference.
A chain price index is a specific method of measuring changes in prices over time. It does not use a fixed reference point to express each figure as a percentage. Instead, each period is expressed as a comparison to the previous period. An on-chain price index for easier at-a-glance reference and also allows changes to the method used to calculate prices.
A standard price index is a way of measuring changes in prices over time. This could be the price of a specific item, a specific type of item, or an attempt to measure all items for sale in a country. In the latter case, the usual technique is to choose a “basket” of goods, which is a selection of items designed to fairly represent all the types of products available.
This standard price index uses an initial figure as the base period. In future periods, the relevant figure is expressed as a percentage of that used in the base period. For example, if during the first three years the price being tracked increased from $200 US Dollars (USD) to $250 USD to $320 USD, the index would start at 100, then increase to 125, and then to 160.
There are two main limitations to this method. First, once the system has been running for a long time, it becomes more difficult to see immediately how large the increase has been between two periods. For example, most people would need to do calculations to work if an increase in the index from 800 to 885 was more significant than one from 3,300 to 3,600.
The second problem is that the index can only work if the price research was always directly comparable to the base period. In practice, this is often not the case. Economists and statisticians tend to change the contents of the “basket” of goods and services to reflect changing tastes. For example, in 2011 UK statisticians stopped including the cost of pork shoulder but began to include the cost of online dating sites. This means that a direct comparison with the base year is no longer fair.
The solution is a chain price index. Under this system, the price figure for each period is expressed as a percentage of the price figure for the previous period. In the $200/250/320 USD example, the index figures for the first two years would remain 100 and 125, but the third year would now be based on the second year, changing the index to 128. This makes it It is easy to see that the change from year two to year three is proportionally very slightly greater than the change from year one to year two. The name chain price index comes from the fact that each comparison between consecutive periods can be chained together to form a consistent and comparable series of index figures.
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