Whole Sale Price Index & Consumer Price Index

Ataur, Manmeet, Rajat, Reena, Trijiya & VaishaliPresented by :

WHAT IS A PRICE INDEX?

Price Index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time.

A price index is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a given region, during a given interval of time.

Why Two Types of Indices?

CPI measures Inflation rate in the country

WPI measures the General Price level in the whole sale market.

What Is Wholesale Price Index (WPI)?

Wholesale Price Index (WPI) is a price index which represents the wholesale prices of a basket of goods over time.

Advantages of WPI:

WPI has been in use in India since many years so the calculation is fairly easy.

It has over time developed and taken into its circle few of the important factors that need to be considered.

WPI measures inflation at each stage of production. WPI is the basis for the economic deflation rate.

Disadvantages of WPI:

WPI is said to give lots of erroneous results. It ignores the service expenses etc which are

more dominant expenses today. It gives the view till the level of the wholesaler.

India is a country with diverse consumer behavior. It is hence not justified to use wholesale rate.

The true inflation rate in the economy is not disclosed.

There are a lot of insignificant goods that are considered in WPI like fodder given to cattle etc. These goods do not construe a high percentage of the income and expense today.

WPI CalculationTo show the calculation, let's assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.

In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

Why is India used WPI?

The size of India in terms of population, land mass and diversity makes it difficult to make the changes.

Political reasons

Multiple formulas for calculating CPI in terms of India.

CPI figures are available on monthly basis while WPI is calculated on a weekly basis

The lag time of WPI is lesser than that of the CPI.

The source of WPI is more trustable.

Consumer Price Index

“ Consumer Price Index is the main measure of price changes at the retail level. It measures changes in the cost of buying a representative fixed basket of goods and services and is generally accepted as a measure of inflation in the country”.

When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

Limitation of CPI

1) Coverage is limited2) Only covers Urban Centres3) Prices may have different trend in rural &

urban centres.4) Rent is computed through construction input

items index instead of rent survey.5) It measures partially inflation not total

consumer’s expenditure.

Selection of Markets/Outlets and Cities

Items are selected on the basis of Family Budget Survey

Markets are selected through retail and wholesale trade survey.

Outlets are selected on transaction value basis.

Cities are selected on population basis

Stratified sampling are used for selection of cities.

CPI Measurement

Step 2: Selection of CPI Basket

The next step is to select the CPI basket. The term basket refers to the goods and services represented in the index and the relative importance attached to each of the items.

This item reflects the typical consumption of a generalhousehold.

CPI MeasurementPrices of selected goods in the CPI basket must be obtained through reliable sources. The basket is valued at a base year price. Then, the same basket willbe valued at a current year price. The current year price index can be obtained

using the following formula:

Current year index = Current year price x 100 Base year price

The base year index is equal to 100.

CPI MeasurementITEM BASE YEAR

PRICE1

CURRENT YEAR PRICE

2

CURRENT YEAR INDEX

2/1 x 100Food 150 240 240/150*100=1

60Apparel 300 420 420/00*100=14

0Medical Care 250 200 200/250*100=8

0Transportation 160 180 180/160*100=1

12.5Simple CPI= Sum of all current year index/ Number

of items492.5/4=123.1

Therefore, the general price level or costs have increased by 23.1 per cent(123.1- 100) from the base year to the current year.

CPI MeasurementStep 4:Weightage

Weightage is the figure used to measure the importance of the item in the basket depending on the amount of money spent by the consumer on each item. The highest weightage shows the most important commodity and the lowest shows the least important commodity for the consumer. For example, if the weightages for food and transportation are 4 and 1 respectively it shows that food is more important since the amount of money spent on food is 4 times more than transportation.Assume that weights are given in respect of the items in Table . The weighted CPI can be calculated as shown in the next give Table .

CPI MeasurementITEM BASE

YEAR PRICE

1

CURRENT YEAR PRICE

2

CURRENT YEAR INDEX

2/1 x 100

WEIGHTS4

WEIGHTED PRICE INDEX

3x4Food 150 240 240/150*1

00=1604 160x4=64

0Apparel 300 420 420/00*10

0=1403 140x3=42

0Medical

Care250 200 200/250*1

00=801 80x1=80

Transportation

160 180 180/160*100=112.5

2 112.5x2=225

Weighted CPI= Sum of all weighted price index/ Total Weights

10 1365/10= 136.5

This shows that the general price level has increased by 36.5 per cent compared to the base year.

Thank you !!