WHAT IS PRICE?

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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.

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 Approval of Group of Experts Derivation of Weights Selection of Cities Selection of Markets 6

7. CPI: characteristics • The main measure of price changes at the retail level. • Measures changes in the cost of buying a representative fixed basket of goods and services • Indicates inflation rate in the country. • Prices are collected from retail stores and service establishments. • The prices constitute the once charged directly to the consumers. • Thus, FBS collects transaction prices as against list or tag prices fixed by the manufacturers or various price-monitoring agencies.

8. CPI is an input price index • 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.

9. FIXATION OF BASKET OF GOODS & SERVICES The current CPI covers 374 items. The basket of goods and services comprise 10 major groups • Transport & communication • vii) Recreation & entertainment • Education • ix) Cleaning, laundry & personal app. • x) Medicare i) Food & beverages ii) Apparel, textile & footwear iii) House rent, iv) Fuel & lighting v) Household, furniture & equip. etc. 9

10. DERIVATION OF WEIGHTS • 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. Po x qo Wi = Weight of the item in the base period = ------------- ∑ Po x Qo Where P0=Price and Q0=Quantity in base period 10

11. SELECTION OF CITIES All the urban centres have been divided into 4 groups • small cities having population 50,000 to 100,000 • iv) additional small cities (one from each province) with population < 50,000 i) large cities having population ≥ 500,000 ii) medium cities having population 100,000 to 500,000 11

12. INCOME GROUPS The current CPI covers the four income groups viz. 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 12

13. SELECTION OF MARKETS (CPI/SPI) Total Markets = 71 13 Note: The cities highlighted with red colour are covered in SPI.

14. METHODOLOGY • Collection of Prices • Averaging collected prices • Computation of Price Index 14

15. COLLECTION OF PRICES 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 15

16. COMPUTATION OF AVERAGE PRICES • 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. 16

17. FORMULA FOR PRICE INDEX Laspeyre’s formula is being used for the computation of Price Indices which is as follows: (Pn/Po) x Wi In = ------------------ X 100 Wi Where 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 17

18. COMPUTATION OF A PRICE INDEX – AN ILLUSTRATION PR = Price Relative WPR = Weighted Price Relative 18

19. COMPUTATION OF A PRICE INDEX - ILLUSTRATION (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 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: 106Items 425Price 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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