The typical use of a fixed-weight price index is to measure the price changes in a selected basket of goods. Changes in the index show the amount of price inflation or deflation for the items picked as index constituents. The fixed part of this type of index is the quantity of each item. The change in the prices of the items is the variable.
Setting a Baseline
The purpose of an index is to measure price changes, so you need to set an initial baseline value. Fix the number of each item to be tracked and multiply by the price to get the starting value of the index. For example, suppose your index will track the price of five units of Item A, priced at $10 on the start date; and 10 units of Item B, worth $5 each. Five times 10 plus 10 times 5 gives the index a starting value of 100. The number of units of each item will stay the same for future index value calculations.
Calculate Current Value and Percentage Change
Calculate the current value of the index by multiplying the fixed number of each item tracked in the index by the current price. In the example, if Item A is now $11 and Item B costs $5.30, the index calculation is 5 times 11 plus 10 times 5.30 equals 108. The percentage change is calculated from either the baseline or the last index value calculation. For the example, the index increased by 8 percent, from the increase of 8 divided by the previous value of 100.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.