1. Whole Sale Price Index
& Consumer Price Index
Ataur, Manmeet, Rajat, Reena, Trijiya & Vaisha
Presented by :
2. 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.
3. Why Two Types of Indices?
CPI measures Inflation rate in the country
WPI measures the General Price level in the
whole sale market.
4. 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.
5. 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.
6. WPI Calculation
To 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.
7. 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.
8. 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.
9. Limitation of CPI
1) Coverage is limited
2) Only covers Urban Centres
3) 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.
10. 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.
11. 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 general
household.
12.
13. CPI Measurement
Prices 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.
14. CPI Measurement
ITEM BASE YEAR
PRICE
1
CURRENT YEAR
PRICE
2
CURRENT YEAR
INDEX
2/1 x 100
Food 150 240 240/150*100=160
Apparel 300 420 420/00*100=140
Medical Care 250 200 200/250*100=80
Transportation 160 180 180/160*100=112.
5
Simple CPI= Sum of all current year index/ Number of items 492.5/4=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.
15. CPI Measurement
Step 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
16. CPI Measurement
ITEM BASE
YEAR
PRICE
1
CURRENT
YEAR
PRICE
2
CURRENT
YEAR
INDEX
2/1 x 100
WEIGHTS
4
WEIGHTED
PRICE
INDEX
3x4
Food 150 240 240/150*10
0=160
4 160x4=640
Apparel 300 420 420/00*100
=140
3 140x3=420
Medical
Care
250 200 200/250*10
0=80
1 80x1=80
Transportati
on
160 180 180/160*10
0=112.5
2 112.5x2=22
5
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.
