How is a price index computed?

What will be an ideal response?

A price index is computed by comparing the total price of a “market basket” of goods and services representing GDP in the given year to the total price of the same market basket in the base year. The given year’s total price is divided by the base year’s total price to arrive at the index figure. The index is expressed as a percentage, so if the base year’s prices are higher than the given year, the index will be less than 100. If the given year’s prices are higher than the base year, the index will be more than 100. The price index for the base year will always be 100 since the numerator and denominator will be the same when the given year and base year are the same.