2 WHAT IS PRICE? Determination of value in terms of money is called price. Price reflects scarcity of a commodity in relation to its demand.
3 WHY OBSERVE PRICE CHANGES Observing prices in absolute terms for administering them. Monitoring inflation at an aggregated level of commodities (price indices): 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.
4 TYPES OF PRICES 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
5 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)
6 MAIN PROCESS FOR DEVELOPING PRICE INDICES Family Budget Survey Fixation of Basket of Goods & Services Derivation of Weights Selection of Cities Selection of Markets Approval of Group of Experts 6
7 CPI: characteristics o The main measure of price changes at the retail level. o Measures changes in the cost of buying a representative fixed basket of goods and services o Indicates inflation rate in the country. o Prices are collected from retail stores and service establishments. o The prices constitute the once charged directly to the consumers. o Thus, FBS collects transaction prices as against list or tag prices fixed by the manufacturers or various price-monitoring agencies.
8 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. CPI is an input price index
9 FIXATION OF BASKET OF GOODS & SERVICES i) Food & beverages ii) Apparel, textile & footwear iii) House rent, iv) Fuel & lighting v) Household, furniture & equip. etc. The current CPI covers 374 items. The basket of goods and services comprise 10 major groups vi)Transport & communication vii) Recreation & entertainment viii)Education ix) Cleaning, laundry & personal app. x) Medicare 9
10 DERIVATION OF WEIGHTS P o x q o Wi = Weight of the item in the base period = ------------- P o x Q o Where P 0 =Price and Q 0 =Quantity in base period 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. 10
11 SELECTION OF CITIES i) large cities having population 500,000 ii) medium cities having population 100,000 to 500,000 All the urban centres have been divided into 4 groups iii)small cities having population 50,000 to 100,000 iv) additional small cities (one from each province) with population < 50,000 11
12 INCOME GROUPS 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 The current CPI covers the four income groups viz. 12
13 Strata-IStrata-IIStrata-IIIStrata-IV CityMark -ets CityMark- ets CityMark- ets CityMark- ets 1-Islamabad041-Jhelum011-Mianwali011-Samundri01 2-Rawalpindi062-Sialkot012-Attock012-Kunri01 3-Lahore073-Sargodha013-Vehari013-Bannu01 4-Gujranwala014-Jhang01 4-Shahdadpur 014-Loralai01 5-Faisalabad025-Okara015-D.I.Khan01 6-Multan036-D.G.Khan016-Khuzdar01 7-Karachi137-Bahawalpur017-Turbat01 8-Hyderabad048-Bahawalnagar01 9-Peshawar039-Sukkur02 10-Quetta0210-Nawabshah01 11-Larkana01 12-Mirpurkhas01 13-Mardan01 14-Abbottabad01 Total Markets = 71 SELECTION OF MARKETS (CPI/SPI) 13 Note: The cities highlighted with red colour are covered in SPI.
14 1.Collection of Prices 2.Averaging collected prices 3.Computation of Price Index METHODOLOGY 14
15 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 COLLECTION OF PRICES 15
16 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. COMPUTATION OF AVERAGE PRICES 16
17 Laspeyres formula is being used for the computation of Price Indices which is as follows: (Pn/Po) x Wi In = ------------------ X 100 Wi WhereIn=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 FORMULA FOR PRICE INDEX 17
18 ItemUnit Price on Weight PR (Col3/ Col4) WPR (Col 6 x col5) 04.09.08Base year PnPo 1234567 MASOOR PULSEKg.122.6036.970.5377 3.31621.7831 MOONG PULSEKg.55.0129.890.5174 1.84040.9522 MASH PULSEKg.75.0246.470.4912 1.61440.7930 GRAM PULSEKg.64.1229.321.0302 2.18692.2529 Total 2.5765 5.7812 PR = Price Relative WPR = Weighted Price Relative COMPUTATION OF A PRICE INDEX – AN ILLUSTRATION 18
19 (Pn/Po) x Wi SPI = In = ------------------ X 100 Wi (Pn/Po) x Wi = 5.7812 Wi = 2.5765 5.7812 SPI = In = ------------------ X 100 2.5765 SPI = 224.3819 COMPUTATION OF A PRICE INDEX - ILLUSTRATION 19
20 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.
21 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 ex- mandi, ex-factory or at an organized wholesale level
22 WHOLE SALE PRICE INDEX (2000-01) 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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