Price indices. The price index formula

Why does the purchasing power of goods fluctuate, but never disappear? How does the employer know how to raise the wages 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 change as a first necessity, and one that we can do without. Such a normal dynamics with a small deviation amplitude and is a price index (hereinafter - IC). This indicator is quite popular in use in many spheres of economic and social activity, and not just because it has a number of historically established prerequisites in its formation and occupying a proper position in society. So, let's highlight some of the features of IC:

• It causes genuine interest not only among the press, but also among ordinary households;
• Thanks to successful long-term use, he earned a reliable and trusted position in the society;
• As a rule, professionals work in this or that sphere, therefore errors in quantitative characteristics are minimal.

Formation of the price index

Each index of the price level pursues certain goals of use, so when they are created, a number of factors are taken into account, which are determined depending on what it serves. Initially, such indicators were created in the eighteenth century.

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

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

• Periodicity of publication (monthly or quarterly);
• Unconditional reliability (manifested in the fact that published indicators are not checked and are not recounted by anyone);
• Full transparency and accessibility (information is placed in mass-media publications, and everyone has the opportunity to get acquainted with it).

Often, price indices in the consumer world replace inflation, which causes a constant conflict between them. This is due to the fact that the former is directed at specific industry data and does not always cover certain consumer goods, the most interesting for households, and vice versa.

Scope of their use

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

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

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

Thirdly, ultimately, the obtained data can be compared with incommensurable indicators. And this means that on the basis of factor analysis there is a possibility in general to predict the rates and directions of the dynamics of inflationary processes in the country.

Territorial predisposition of IC

Not always price indices are measured within the framework of one state, so often in modern practice of economic analysis territorial comparisons are used. So, a certain category of goods is taken , the dynamics of fluctuations in their value in several countries is calculated and on the basis of the obtained final indicators they are compared in their totality.

Often, such analyzes are carried out by companies that practice trade in several countries. Since it is extremely important for them to have an idea of the level of revenue and the corresponding net profit in various territorial market segments. Such indicators directly affect the level of sales.

Price Index: calculation formula

It is difficult to have any idea of the coefficients and their significance, if one does 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 the direction in which the demand for goods A has changed in the last 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 goods A = Price of goods A in June 2015: The price of goods A in May 2015.

It is not difficult to guess: if the received indicator is more than one, then, most likely, the demand for the products under consideration has to some extent fallen.

How to adjust prices

Few of ordinary consumers in the face of housewives thought about why prices never grow evenly. But nevertheless, the government is pursuing a policy aimed at regulating the dynamics of this indicator, in the performance of which the indices of price transfer are actively applied.

The most active such government activities in Western countries. It is similar in the direct installation of the disparity of the cost of production, which means some kind of freezing of this value. Or, perhaps, the indirect influence of the state on pricing in the country. In this case, tax duties, customs duties and other mandatory payments to the treasury are reduced.

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

Indices in business

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

With the current level of inflation, it is very difficult to keep your own business afloat unless you follow the nominal value of your own working capital. After all, if we sell goods based on the old value of production stocks, then, having purchased the next batch already at new prices, we are unlikely to remain with any profit.

In this case, the value of the finished product is regulated either with the help of the current inflation index , taking into account the deflator of GNP, or it is calculated by regulating the value of the components of circulating reserves, the nominal value of which varies according to individual ICs for each of them.

Indices and income of the population

The most significant inflation is in its even the slightest manifestation for those unprotected layers of the population who receive systematic benefits from the state - pensioners, beneficiaries and others. For them, the price increase index is, first of all, a decrease in the ability to provide for oneself.

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 most in demand among pensioners and disabled people, and further, taking into account the data obtained, raise the level of benefits.

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

Indexing in Russia

The index of current prices is a very painful issue and therefore complex in the territory of our state. Over the past few decades, there have been situations where the rate of inflation due to the transition to a market economy in the country was so great that the level of income of the population did not match even the minimum consumer basket.

Such situations have a destructive 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 the expulsion from the cash market as such and the spread of foreign banknotes. That, in turn, entails a rapid development of the shadow economy.

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