Transcript Introduction to Price Indices

1
WHAT IS PRICE?
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Determination of value in terms of money is
called price.
Price reflects scarcity of a commodity in relation
to its demand.
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WHY OBSERVE PRICE CHANGES
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Observing prices in absolute terms for administering
them.
Monitoring inflation at an aggregated level of
commodities (“price indices”):
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Curbing undesired inflation as a matter of monetary or
economic policy.
Using price indices for deflation of macro-economic
aggregates.
Price escalation clauses for tariffs & contracts.
Enabling international price comparisons.
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TYPES OF PRICES
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Producer Price: Prices determined at factory
gate.
Wholesale Price: Producer price + transport
charge + taxes + profit margin + middleman
charges if any.
Retail Prices : Wholesale prices+ transport
charge + taxes + profit margin + middleman
charges if any
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RELEVANT TYPES OF PRICE
INDICES
Consumer Price Index (CPI)
 Sensitive Price Indicator (SPI)
 Producer Price Index (PPI)
 Wholesale Price Index (WPI)
 Unit values
 Measures of core inflation (CPI)
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MAIN PROCESS FOR DEVELOPING PRICE
INDICES
Family
Budget
Survey
Fixation of Basket of
Goods & Services
Approval
of
Derivation of Weights
Group
Selection of Cities
of
Selection of Markets
Experts
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CPI: characteristics
o
o
o
o
o
o
The main measure of price changes at the retail
level.
Measures changes in the cost of buying a
representative fixed basket of goods and services
Indicates inflation rate in the country.
Prices are collected from retail stores and
service establishments.
The prices constitute the once charged directly
to the consumers.
Thus, FBS collects transaction prices as against
list or tag prices fixed by the manufacturers or
various price-monitoring agencies.
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CPI is an input price index
We are measuring the inputs entering the
private households for consumption purpose.
 We interview the households to sound out the
patterns of consumption (weighting scheme).
 But for measuring the prices over time we go the
easier way and ask the retailers.
 In contrast to that a retail price index would be
an output index which covers all retail
transactions, including those which do not
constitute private consumption.
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FIXATION OF BASKET OF GOODS & SERVICES
The current CPI covers 374 items. The basket of goods and services comprise
10 major groups
i) Food & beverages
vi) Transport & communication
ii) Apparel, textile & footwear
vii) Recreation & entertainment
iii) House rent,
viii) Education
iv) Fuel & lighting
ix) Cleaning, laundry & personal app.
v) Household, furniture & equip. etc.
x) Medicare
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DERIVATION OF WEIGHTS
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Family Budget Survey provides the details of commodity-wise
expenditure of households of different income groups.
Weight of a commodity is average percentage expenditure by
households on a commodity.
Po x qo
Wi = Weight of the item in the base period = ------------∑ Po x Qo
Where P0=Price and Q0=Quantity in base period
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SELECTION OF CITIES
All the urban centres have been divided into 4 groups
i) large cities having
population ≥ 500,000
iii) small cities having
population 50,000 to
100,000
ii) medium cities having
population 100,000 to
500,000
iv) additional small cities
(one from each
province) with
population < 50,000
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INCOME GROUPS
The current CPI covers the four income groups viz.
i) Up to Rs. 3,000
ii) Rs. 3,001 to 5,000
iii) Rs. 5,001 to 12,000
iv) Above Rs. 12,000
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SELECTION OF MARKETS (CPI/SPI)
Strata-I
Strata-II
City
Mark
City
-ets
1-Islamabad
04 1-Jhelum
Strata-III
Strata-IV
MarkCity
MarkCity
Markets
ets
ets
01
1-Mianwali
01
1-Samundri
01
2-Rawalpindi
06
2-Sialkot
01
2-Attock
01
2-Kunri
01
3-Lahore
4-Gujranwala
5-Faisalabad
6-Multan
7-Karachi
8-Hyderabad
9-Peshawar
10-Quetta
07
01
02
03
13
04
03
02
3-Sargodha
4-Jhang
5-Okara
6-D.G.Khan
7-Bahawalpur
8-Bahawalnagar
9-Sukkur
10-Nawabshah
11-Larkana
12-Mirpurkhas
13-Mardan
14-Abbottabad
01
01
01
01
01
01
02
01
01
01
01
01
3-Vehari
01
01
01
01
01
3-Bannu
4-Loralai
01
01
4-Shahdadpur
5-D.I.Khan
6-Khuzdar
7-Turbat
Total Markets = 71
Note: The cities highlighted with red colour are covered in SPI.
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METHODOLOGY
1. Collection of Prices
2. Averaging collected prices
3. Computation of Price Index
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COLLECTION OF PRICES
Four quotations of price of each item are collected in one market.
As CPI covers 71 markets
Therefore, the total number of quotations for one items
71 x 4 = 284
And the total number of quotations for 374 items
374 x 71 x 4 = 106,216
SPI covers 53 markets
Therefore, the total number of quotations for one item
53 x 4 = 212
And the total number of quotations for 53 items
53 x 53 x 4 = 11,236
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COMPUTATION OF AVERAGE PRICES
• Four quotations of price of each item are collected in one
market and simple average of these four quotation of prices
of each item are taken as average price of the item in that
market.
• Then the average prices of all markets in the city are
averaged at city level.
• The average prices of all 35 cities (CPI) and 17 cities (SPI)
are again averaged at National level.
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FORMULA FOR PRICE INDEX
Laspeyre’s formula is being used for the computation of Price Indices which is as
follows:
(Pn/Po) x Wi
In = ------------------ X 100
Wi
Where In
=
Index for the nth period
Pn
=
Price of an item in the nth period
Po
=
Price of an item in the base period
Wi
=
Weight of the ith item in the base period
Wi
=
Total weight of all items
(Pn/Po) x Wi =
Total of weighted price relatives
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COMPUTATION OF A PRICE INDEX – AN ILLUSTRATION
Price on
04.09.08 Base year
PR (Col3/ WPR (Col
Col4)
6 x col5)
Item
Unit
Pn
Po
Weight
1
2
3
4
5
6
7
MASOOR PULSE
Kg.
122.60
36.97
0.5377
3.3162
1.7831
MOONG PULSE
Kg.
55.01
29.89
0.5174
1.8404
0.9522
MASH PULSE
Kg.
75.02
46.47
0.4912
1.6144
0.7930
GRAM PULSE
Kg.
64.12
29.32
1.0302
2.1869
2.2529
Total
2.5765
5.7812
PR = Price Relative
WPR = Weighted Price Relative
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COMPUTATION OF A PRICE INDEX - ILLUSTRATION
SPI = In
(Pn/Po) x Wi
= ------------------ X 100
Wi
(Pn/Po) x Wi = 5.7812
Wi = 2.5765
SPI = In
5.7812
= ------------------ X 100
2.5765
SPI = 224.3819
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Sensitive Price Indicator (SPI)
 Sensitive
Price Indicator (SPI) is
designed to assess price movement of
essential consumer items at short
intervals (on weekly basis) so as to take
corrective measures.
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WHOLESALE PRICE INDEX (WPI)
Wholesale price index (WPI) is designed to measure
the change of price in the primary and wholesale
markets. It covers precisely defined commodities
offered in the lots by producer/manufacturers to
suppliers/primary sellers. Prices used are generally
those at which primary selling is transacted at exmandi, ex-factory or at an organized wholesale level
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WHOLE SALE PRICE INDEX (2000-01)
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Coverage:
Commodities: 106
Items 425
Price Quotations 1550
CITIES:18 Major Cities
1. Lahore
2. Faisalabad 3. Rawalpindi 4. Multan 5. Gujranwala
6. Sialkot
7. Sarghoda 8. Bahawalpur 9. Sahiwal 10. Karachi
11. Hyderabad 12. Sukkur
13. Nawabshah 14. Larkana
15. Peshawar
16. Quetta.
17. Mirpurkhas 18.Mingora
GROUPS & WEIGHTS:Commodity Group
Weight No. of Items
No. of Commodities
No. of Price
Quotation
FOOD
42.12
106
43
693
RAW MATERIALS
7.99
25
09
104
FUEL, LIGHTING
& LUBRICANTS
19.29
17
11
36
MANUFACTURES
25.87
227
32
564
BUILDING
MATERIALS
4.73
50
11
153
TOTAL
100.00
425
106
1550
PERIODICITY OF PRICE COLLECTION: - 11th to 14th of Each Month (Monthly)
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Thanks
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