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    1. Randy is offline

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      #1

      How is the wholesale price index calculated?

      Can anyone explain to me how the wholesale price index is calculated? Any help would be appreciated.
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    2. CWayCross is offline

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      #2
      A wholesale price index (WPI) is the average value of a collection, or “basket”, of wholesale goods considered to be representative of products bought routinely in a given country (the US's basket might include DVDs, Uggs boots, microwave dinners, potato chips).The wholesale price index is also known as the total cost of the wholesale products. The price index is used to measure the cost of the products traded between companies (eg, manufacturing materials), and also for measuring the items purchased by individuals (our DVDs and Pringles from the above example).

      It's mainly used to determine how the prices of the given items has changed over time, and is typically a reliable metric in determining inflation over a course of years.

      There's several methods used for calculating a given WPI--

      1. Laspeyres Formula

      This is a relative method which compares the price of the product in question (ie, DVDs) between two different time periods. The first period, called the base period, and a year some point in the future (DVD prices calculated in 2005, and compared to a base period of 1995)

      Using the formula

      Where P is the change in price level, t0 is the base period (1995), and tn the period for which the index is computed (2005), and qc is the price of the items in the basket.

      2. Ten-Day Price Index

      Products with a high monthly fluctuation rate are used to calculate the wholesale price index. The items-- such as gasoline-- are observed over a period of (you guessed it) ten days. The prices for the rest of the products are considered to be static, at least compared to the items indexed. For instance, gas prices tend to fluctuate a whole lot more than potato chips, and so a ten-day observation of gas prices (et al) would give a good idea of the index without worrying about more stable items, like DVDs and chips.

      3. Calculation Method

      Some countries calculate the wholesale price index by focusing on product types. There are five main types of products:

      ▪ Agriculture

      ▪ Consumer Goods

      ▪ Mining

      ▪ Manufacturing

      ▪ Quarrying

      Calculation method is the most straightforward of the ways of determining a WPI-- the given product (our DVDs, gas, etc) are observed over three ten-day periods, which are then averaged at the end of the month. This arithmetic mean is the resulting WPI.
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    3. Randy is offline

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      #3
      Thank you! I have another question for you. Do you know the difference between wholesale price index and consumer price index? As in, what are they each used for? If so, can you please share?

    4. CWayCross is offline

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      #4
      Sure! While the wholesale price index is used to calculate trades between companies (raw materials, manufacturing supplies), the consumer price index focuses on consumer purchases (again, DVDs, et al). It is mostly a matter of scope. The WPI deals exclusively with wholesale prices, and the consumer index is concerned with retail prices.

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