Laspeyres index

A price index is a numerical time series measure designed to help compare how the prices of some class of goods and/or services, taken as a whole, differ between time periods or geographical locations. In the latter case, these are known as purchasing power parity measures. The class of goods can be quite broad; in a consumer price index, for instance, the class of goods is roughly "things bought by a typical urban consumer". As an example of a narrower index, the United States Bureau of Labor Statistics has a price index for "steel mill products". Sometimes an index will be very specific, as in the US Energy Information Administration index entitled "Gasoline - All Grades".
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Sum(p2q1)/Sum(p1q1)--A weighted aggregative index showing the ratio of expenditures in the current period (p2q1: where p2 is the current period price and q1 is the base period quantity) to the expenditure in the base period (p1q1: where p1 is the current period price and q1 is the base period quantity) to purchase the identical market basket of items. It answers the question "How much more or less does it cost now to purchase the same items as in the base period?". The main shortcoming of the Laspeyres index is in that it does not track actual expenditures because consumers adjust their buying in response to changes in relative price, changing the composition of the market basket. This invalid assumption that consumer demand is totally price inelastic causes the index to overstate the actual effect on consumers when there is a change in prices.