Any price index indicates the average price
movement of a fixed basket of goods and services over time. Depending on whether
the changes are to be measured in retail, wholesale or producer prices, an appropriate
basket of goods and services is chosen.
On 14th May, the Office of
Economic Adviser, Ministry of Commerce & Industry, New Delhi released the
WPI Index data for May 2015.
Methodology
of Index Calculation
Actual index compilation is done in stages.
In the first stage, once the price data is collected, price relative for each
price quote is calculated. Price relative is the ratio of the current price to
the base price multiplied by 100 i.e. (P1/Po)*100.
In the next stage, commodity/item level index
is arrived at as the simple arithmetic average of the price relatives of all
the varieties (each quote) included under that commodity. An average of price
ratio/relative is used under implicit assumption that each price quotation
collected for an item/commodity index compilation has equal importance, i.e.,
the share of production value is equal.
Whereas if the ratio of average prices is adopted instead, the implicit
assumption would be that importance of each price quotation depends on its
price level in the base period and all the quantities produced are equal. Since
quantities produced at unit level are not equal, the average of price
relatives’ method is preferred to arrive at item level index in WPI.
Next, the indices for the sub
groups/groups/major groups are compiled and the aggregation method is based on Laspeyres formula as below:
