What is the first step in constructing a price index?

The first step in constructing a price index is to select commonly purchased goods and services. This process is essential because the price index aims to measure the overall price changes for a basket of goods that are representative of what consumers typically buy. By choosing a diverse and relevant set of items, the index can accurately reflect the cost of living and changes in consumer pricing over time.

Once the specific goods and services are identified, subsequent steps such as gathering data on prices, determining a base year for comparison, and calculating average prices can be conducted. Each of these steps builds on the foundation of selecting a representative basket of goods, which is crucial for ensuring that the price index serves its purpose of tracking inflation or deflation effectively.