1 1. 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.

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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.

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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.

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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

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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

FamilyBudgetSurvey Fixation of Basket of

Goods & Services

Derivation of Weights

Selection of Cities

Selection of Markets

Approval

of

Group

of

Experts

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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.

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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

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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

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DERIVATION OF WEIGHTS

Po x qo

Wi = Weight of the item in the base period = ------------- ∑ Po x Qo

Where P0=Price and Q0=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.

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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

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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.

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Strata-I Strata-II Strata-III Strata-IVCity Mark

-etsCity Mark-

etsCity Mark-

etsCity Mark-

ets1-Islamabad 04 1-Jhelum 01 1-Mianwali 01 1-Samundri 01

2-Rawalpindi 06 2-Sialkot 01 2-Attock 01 2-Kunri 01

3-Lahore 07 3-Sargodha 01 3-Vehari 01 3-Bannu 014-Gujranwala 01 4-Jhang 01 4-Shahdadpur 01 4-Loralai 015-Faisalabad 02 5-Okara 01 5-D.I.Khan 016-Multan 03 6-D.G.Khan 01 6-Khuzdar 017-Karachi 13 7-Bahawalpur 01 7-Turbat 018-Hyderabad 04 8-Bahawalnagar 019-Peshawar 03 9-Sukkur 0210-Quetta 02 10-Nawabshah 01

11-Larkana 0112-Mirpurkhas 0113-Mardan 0114-Abbottabad 01

Total Markets = 71

SELECTION OF MARKETS (CPI/SPI)

13Note: The cities highlighted with red colour are covered in SPI.

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1. Collection of Prices

2. Averaging collected prices

3. Computation of Price Index

METHODOLOGY

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Four quotations of price of each item are collected in one market.

As CPI covers 71 marketsTherefore, the total number of quotations for one items 71 x 4 = 284And the total number of quotations for 374 items 374 x 71 x 4 = 106,216

SPI covers 53 marketsTherefore, the total number of quotations for one item 53 x 4 = 212And the total number of quotations for 53 items 53 x 53 x 4 = 11,236

COLLECTION OF PRICES

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• 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

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Laspeyre’s formula is being used for the computation of Price Indices which is as follows:

(Pn/Po) x WiIn = ------------------ X 100

WiWhere 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

FORMULA FOR PRICE INDEX

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Item Unit

Price on

WeightPR (Col3/

Col4)WPR (Col 6 x col5)

04.09.08Base year

Pn Po

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 RelativeWPR = Weighted Price Relative

COMPUTATION OF A PRICE INDEX – AN ILLUSTRATION

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(Pn/Po) x WiSPI = In = ------------------ X 100

Wi

(Pn/Po) x Wi = 5.7812

Wi = 2.5765

5.7812SPI = In = ------------------ X 100

2.5765

SPI = 224.3819

COMPUTATION OF A PRICE INDEX - ILLUSTRATION

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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 ex-mandi, ex-factory or at an organized wholesale level

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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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Thanks

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