PRICE

INDEX
 PRICE INDEX
PRICE INDECIES 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.
Broadly speaking, the CPI measures the price of consumer goods and how they're trending.
It's a tool for measuring how the economy as a whole is faring when it comes to inflation or
deflation. When planning how you spend or save your money, the CPI can influence your
decisions.
To construct a price index we start by selecting a base year. Then we take a representative
sample of goods and services and calculate their value in the base year and current prices.
The ratio of the expenditures on the basket of goods at current prices to the expenditure at
the base year prices is taken as the price index.
For example, suppose our basket of goods consists of only three items: shirts, pants and bread
with the following prices and quantities in 2006 and 2007:
Market Basket for 2006 = (10*
$10) + (5* $20) + (100* $0.50) =
$100 + $100 +$50 = $250
Market Basket for 2007 = (10*
$12) + (5* $25) + (100* $0.55) =
$120 + $125 + $55 = $300
 Types of Price Indices
CONSUMER PRICE INDEX (CPI)
WHOLESALE PRICE INDEX (WPI)

CONSUMER PRICE INDEX (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of
a basket of consumer goods and services, such as transportation, food, and medical care. It is
calculated by taking price changes for each item in the predetermined basket of goods and
averaging them. Changes in the CPI are used to assess price changes associated with the cost
of living.
The Consumer Price Index measures the average change in prices over time that consumers
pay for a basket of goods and services.
It is the most widely used measure of inflation.
The CPI statistics cover a variety of individuals with different incomes, including retirees, but
does not include certain populations, such as patients of mental hospitals.

.
CALCULATION FOR CPI WHO CALCULATES CPI

COMPOSITION OF GROUPS
PRESENT IN CPI.

The Ministry of Statistics and Programme Implementation

(MOSPI) calculates the CPI for the country as a whole and for
individual states. Also, the Labour Bureau of India defines CPI
in India in three main categories.
1. CPI for Industrial Worker
2. CPI for Rural Labourer
3. CPI for Agricultural Labourer
Uses of the Consumer Price Index
To serve as an economic indicator: The Consumer
Price Index is a measure of the inflation faced by
the end user. It can determine the purchasing
power of the dollar. It is also a proxy for the
effectiveness of a governments economic policy

To adjust other economic indicators for price

changes: For example, components of national
income could be adjusted using CPI.

Provides cost of living adjustments for wage

earners and social security beneficiaries and
prevents an inflation-induced increase in tax
rates
LIMITATIONS OF CPI
1) Coverage is limited.
2) Only covers urban areas.
3) Prices may have different trend in rural & urban areas.
4) Rent is computed through construction Input items index instead of rent survey.
5) It measures partially inflation not total consumer's expenditure.

Limitations in Measurement of the CPI

Sampling error: Risk of the right sample not being chosen. The sample chosen might
not accurately represent the entire population.
Non-sampling error: Non-sampling errors include errors associated with price-data
collection and errors associated with operational implementation.
Doesn’t include energy costs: A major criticism of the CPI is that it doesn’t include
energy costs even though these are a major expenditure for most households.
WHOLESALE PRICE INDEX (WPI)
Wholesale Price Index (WPI) is an indicator of price
changes in the wholesale market. WPI calculates
the price paid by the manufacturers and
wholesalers in the market. WPI measures the
changes in commodity price at selected stages
before goods reach the retail level.

The index basket of the WPI covers commodities

falling under 3 major groups –
Primary articles
Fuel and Power
Manufactured products
To compile WPI, prices are tracked as under –
Manufactured Products : Ex-factory price
Agricultural Commodities : Agri – market (mandi)
price
Minerals : Ex-mines prices
CALCULATION OF WPI
Compilation of WPI consists of two stages :
1.Price Relatives (Price change) are calculated as follows :
Ii = (Current Price / Base Period Price) × 100
These elementary indices are the lowest level of aggregation where prices are combined
into price indices.
2.In the second stage, these elementary price indices are aggregated using weighted
arithmetic mean to obtain higher level indices.
WPI = ∑ ( Ii × Wi) / Wi
Where,
WPI = Wholesale Price Index
Ii = Index of the ith item
Wi = Weight assigned to ith item
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.
Transparency
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.
WHY INDIA IS STILL FOLLOWING WPI METHOD?

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.
DIFFERENCE B/W CPI AND
WPI
Thank
You