WHOLESALE PRICE INDEX -ALL YOU NEED TO KNOW
An indicator that keeps a track of the change in prices of wholesale goods, the Wholesale Price Index is a variable value. Concerned with the price of commodities that are dealt with at the wholesale level, the construct of the Wholesale Price Index is a major determinant of an economy’s inflation level. This index reflects on the change in the average price of goods that are traded in bulk. Unlike the price that is demarcated at the retail level wherein individual consumers purchase goods from the market, the Wholesale Price Index (WPI) focuses on the average price a trader has to pay when buying goods wholesale. Released by the Economic Adviser of the Ministry of Commerce and Industry, this financial index is different from the Consumer Price Index (CPI) which refers to a change of prices of goods purchased by consumers at the retail level.
While the Wholesale Price Index focuses on the wholesale level, the concept of CPI focuses on the retail level. Wholesale Price Index and Consumer Price Index are the two most effective and common measures that are worked upon in order to determine the market inflation of an economy.
When it comes to the working of this concept, the Wholesale Price Index has a particular formula that indicates the change in prices. But before that, we shall understand the working of this construct.
For the total price of goods released in a span of a year that needs to be calculated, a base year is determined before the change has to be calculated. A base year in India is a year that comes first in a chain of years.
In identifying the base year, a group of criteria is required to be administered. This involves the following points-
The base year should belong to peacetime or a stable era in terms of economic activities.
- The year should not belong to a period of business cycles.
- Reliable data on price should be available for that specific year.
- The year should be recent, it should not become outdated by the time prices are released
- The year for various economic factors should not be outdated.
Usually, the wholesale price index base year is selected from a set of recent years that helps to reflect on the change more specifically.The base year helps in comparing the change in prices. After that base year is determined, the total cost of that particular year is considered to be 100. From here on, the total price of goods for another year (referred to as the current year) is added up and calculated with the help of the given wholesale price index formula.
The WPI is calculated using the Laspeyres formula, which measures the change in the cost of purchasing the same basket of items in the current period as was purchased in a specified earlier period.” WPI formula
WPI= (Current Price / Base Period Price) × 100
Let us now understand this wpi formula with the help of an example. Suppose, the total price of goods in the current year (2016) is INR 3,500.
To calculate the change in prices, we consider 2010 as the Base Year. The total price of goods in the base year is INR 2,000. Now, with the help of this formula, we will calculate the WPI index.
WPI = (3,500/2,000) × 100
WPI= (17.5/10) × 100
WPI= 175
Since the base year’s WPI is considered to be 100 on the scale, the difference between the current year’s WPI and the base year’s WPI is 75% (175-100). Thus, 75% is the WPI for our current year (2016).
Components of Wholesale Price Index
The total weight of the Wholesale Price Index involves a number of components of WPI that account for the items included in wpi in India. The total WPI weightage here refers to 100 that demarcates the value of WPI of a base year on the scale.
- The first component involves Manufactured Goods. This category involves goods such as chemical and related products, metal products, raw metals, alloys, machinery, etc. The component of Manufactured Goods accounts for 64.9% of the total weight alone.
- The second component focuses on the division of Primary Articles. Primary Articles account for 20.12% of the total weight. Primary Articles are further divided into:
- Non-Food- Non-Food Primary Articles include minerals, cooking oil, fibers, cotton, and jute.
- Food- Food Primary Articles involve food materials like pulses, cereals, fruits and vegetables, dairy products, spices, and tea and coffee.
- The third component focuses on Fuel and Power. This category accounts for a total of 14.91%. It accommodates goods such as kerosene, diesel, LPG, coal, and electricity.
