Price indices. Price Index Formula

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

Why does the purchasing power of goods fluctuate but never disappear? How does the employer know how much to raise the salary of his employee? About this and much more - in the article below.

What are price indices

In everyday life, we are not always able to notice how the prices of products, both essential and those that we can do without, are changing. Such normal dynamics with a small amplitude of deviation is what price indices (hereinafter referred to as PIs) are.

This indicator is quite popular in use in many areas of economic and social activity, and not just because it has a number of historical prerequisites in its formation and taking a proper position in society. So, let's highlight some of the features of the IC:

• he is of genuine interest not only among the press, but also among ordinary households;
• through many years of successful use, it has earned a secure position of trust in society;
• as a rule, professionals in this or that field work on its compilation, so the errors in quantitative characteristics are minimal.

Formation of price index

Each price level index has a specific purpose of use, so a number of factors are taken into account when creating them, which are determined depending on what it will serve. Initially, such indicators were created back in the eighteenth century.

At that time, when they were formed, the goal was to compensate for the labor costs of workers as their piecework salary, taking into account inflationary indicators of consumer goods. Today, this phenomenon is called indexing.

In the modern world, the final formed ICs have the following features:

• frequency of publication (monthly or quarterly);
• unquestioning reliability (manifested in the fact that the published figures are not checked and recalculated by anyone);
• complete transparency and accessibility (information is placed in mass-use publications, and everyone has the opportunity to get acquainted with it).

Often, price indices in the consumer world replace inflation indicators, which causes constant conflict between them. This is due to the fact that the first one is focused on specific industry data and does not always cover certain consumer goods that are most interesting for households, and vice versa.

Sphere of their use

In the modern economic system, there are several key tasks for which price indices are used.

Wo-First, when conducting a qualitative analysis, ICs are used for factor analysis. Thus, analysts can identify the dynamics of changes in a sequential sequence. At the output, there are several indicators that differ from each other - they are collectively called the index system.

Secondly, according to the data obtained, it is possible to determine the degree of influence of one or another element on the total cost of production. In other words, it becomes clearer which specific component is most significant for regulating pricing policy.

Third, ultimately, the data obtained can be compared with incommensurable indicators. And this means that on the basis of factor analysis, it is likely to generally predict the pace and direction of the dynamics of inflationary processes in the country.

Territorial predisposition of IC

Price indices are not always comparable within one state, therefore territorial comparisons are often used in modern practice of economic analysis. So, a certain category of goods is taken, the dynamics of fluctuations in their cost in several countries is calculated and, based on the final indicators obtained, they are compared in their entirety.

Often, these analyzes are carried out by companies trading in several countries. Because it is extremely important for them to have an idea of the level of revenue and the corresponding net income in various territorial market segments. Such indicators directly affect the level of sales.

Price index:calculation formula

It is difficult to have any idea about the coefficients and their significance, if you do not understand how they are calculated, and which of the components carry this or that degree of influence. Let's try to give an example: we need to understand in which direction the demand for product A has changed over the past month, so first of all we must calculate such an indicator as the price index. The formula in its original form will look like this:

Price Index of Good A=Price of Good A in June 2015: Price of Good A in May 2015

It's not hard to guess: if the resulting figure is greater than one, then, most likely, the demand for the products in question has fallen to some extent.

How to regulate prices

Few household consumers have thought about why prices never rise evenly. But nevertheless, the state is pursuing a policy aimed at regulating the dynamics of this indicator, during the execution of which price translation indices are actively used.

The most active similar government activities in Western countries. This is manifested in the direct setting of the disparity in the cost of production, which means a certain freezing of this value. Or, perhaps, the indirect influence of the state on pricing in the country. In this case, tax duties, customs fees and other obligatory payments to the treasury are reduced.

However, do not forget that it is much more difficult to regulate the behavior of a monopolist thanan enterprise operating under conditions of normal competition. Therefore, in such cases, the disparity is set in accordance with the costs spent on the production of a particular product. At the same time, the rate constantly fluctuates depending on inflation coefficients.

Indices in entrepreneurship

It should be understood that the price change index is a useful indicator not only for the state to keep abreast of manufacturers, but also for entrepreneurs themselves to often use it to analyze their own production activities.

With the current level of inflation, it is very difficult to keep your own business afloat if you do not follow the nominal value of your working capital. After all, if we sell goods based on the old cost of inventories, then, having purchased the next batch at the new prices, we are unlikely to be left with any profit.

In this case, the cost of finished goods is adjusted either using the current inflation index, taking into account the GNP deflator, or is calculated by adjusting the value of the components of working stocks, the nominal value of which fluctuates in accordance with individual PIs for each of them.

Indices and household incomes

Inflation is most noticeable in its even slightest manifestation for those vulnerable segments of the population who receive systematic benefits from the state - pensioners, beneficiaries and others. For them, the price growth index is, first of all, a decrease in the ability toself-support.

The approach of the government of each country in this case is individual. Thus, countries with a high level of development of capitalism calculate individual coefficients aimed at goods that are most in demand among pensioners and the disabled, and then, taking into account the data obtained, increase the level of benefits.

On the territory of the post-Soviet space, the size of the minimum pension is calculated in accordance with the subsistence level of a working person, without taking into account age and social characteristics in the needs of the older and unprotected segment of the population.

Indexation in Russia

The current price index is a very painful and therefore complex issue on the territory of our state. Over the past few decades, there have been situations when the rate of inflation in connection with the transition to a market economy in the country was so high that the level of income of the population did not even correspond to the minimum consumer basket.

Such situations have a detrimental effect not only on households, but also on the system of monetary circulation of the state as a whole. Since the level of confidence in the national currency is steadily falling, which entails its displacement from the cash market as such and the spread of foreign banknotes. Which, in turn, entails the rapid development of the shadow economy.

Therefore, it is extremely important to monitor not only the level of indexation of the cost of goods, but also the income level of the population, so as not to undermine boththe authority of government organizations, and the value of the currency as a whole.