The stochastic approach to price index numbers: An expository note

The present paper provides an objective basis for selecting the best among four commonly used price index numbers, namely the Laspeyres price index, the Paasche price index, the simple aggregative price index and the simple arithmetic mean of price relatives. The criterion is developed within a stochastic framework that also enables researchers to test hypotheses about the index numbers themselves. The paper also provides nonparametric interpretations of these indices.