Why does the purchasing power of goods fluctuate but never disappear? How does the employer know how much to raise wages to their 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 prices for products of both essentials and those that we can do without are changing. Such normal dynamics with a small deviation amplitude is price indices (hereinafter - IC).
This indicator is quite popular in many areas of economic and social activity, and not just because it has a number of historically established prerequisites in its formation and taking a proper position in society. So, we highlight some of the features of IC:
- it arouses genuine interest not only in the press, but also in ordinary households;
- thanks to successful long-term use, he has earned a reliable, trusting position in society;
- as a rule, professionals in a particular field work on its preparation, therefore, errors in quantitative characteristics are minimal.
Price Index Formation
Each price level index pursues certain uses, therefore, when creating them, a number of factors are taken into account, which are determined depending on what it will serve for. Initially, such indicators were created in the eighteenth century.
At that time, during their formation, the goal was to compensate for the labor costs of workers as their piece-rate 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);
- Unquestionable reliability (manifested in the fact that published indicators are not checked and are not recounted by anyone);
- full transparency and accessibility (information is published in mass media, and everyone has the opportunity to get acquainted with it).
Often, price indices in the consumer world replace inflation indicators, which causes a constant conflict between them. This is due to the fact that the first is aimed at specific industry data and does not always cover certain consumer goods that are most interesting for households and vice versa.
Scope of use
In the modern economic system, there are several key tasks for the solution of which price indices are used.
Firstly, when conducting a qualitative analysis, ICs are used for factor analysis. Thus, analysts can identify the dynamics of changes in sequential order. The output remains 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 an element on the total cost of production. In other words, it becomes clearer which specific component is most significant for the regulation of pricing policy.
Thirdly, ultimately, the data obtained can be compared with disparate indicators. And this means that on the basis of factor analysis, it is likely to predict in general the pace and direction of the dynamics of inflationary processes in the country.
Territorial predisposition of IC
Price indices are not always commensurate within the framework of 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 value in several countries is calculated , and based on the final indicators obtained, they are compared in their entirety.
Often, such analyzes are conducted by companies practicing 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 you do not understand how they are calculated, and which of the components carry one degree or another 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:
- Product price index A = Product price A in June 2015: Product price A in May 2015.
It is not difficult to guess: if the obtained indicator is more than unity, then, most likely, the demand for the products in question fell to some extent.
How to adjust prices
Few ordinary consumers in the person of housewives have thought about why prices never rise evenly. Nevertheless, the state is pursuing a policy aimed at regulating the dynamics of this indicator, the implementation of which price translation indices are actively used.
The most active such government activities in Western countries. This is manifested in the direct installation of disparity in 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 obligatory payments to the treasury are reduced.
However, one should not forget that it is much more difficult to regulate the behavior of a monopolist than enterprises operating in conditions of normal competition. Therefore, in such cases, disparity is established in accordance with the costs spent on the production of a product. At the same time, the rate constantly fluctuates depending on inflation factors.
Indices in Entrepreneurship
It should be understood that the price change index is a useful indicator not only for the state to keep a finger on the pulse of manufacturers, but entrepreneurs themselves often used it to analyze their own production activities.
At the current level of inflation, it is very difficult to keep your own business afloat if you do not monitor the nominal value of your own working capital. Indeed, if we sell goods, starting from the old cost of inventories, then, having bought 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 using the current inflation index taking into account the GNP deflator, or it is calculated by adjusting the value of the components of working capital stocks, the nominal value of which varies in accordance with individual ICs for each of them.
Indices and incomes
Inflation is most tangible in its even the slightest manifestation for those vulnerable groups 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 to provide for themselves.
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 the goods most in demand among pensioners and people with disabilities, and then, taking into account the data obtained, increase the level of benefits.
In the territory of the former Soviet Union, the minimum pension is calculated in accordance with the living wage of a working person, without taking into account age and social characteristics in the needs of the older and unprotected layer of the population.
Indexing in Russia
The current price index is a very painful issue and therefore complex on the territory of our state. Over the past few decades, there have been situations when the inflation rate in connection with the transition to a market economy in the country was so high that the income level 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 monetary system of the state as a whole. Since the level of confidence in the national currency is steadily falling, which entails the crowding out of 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 value of goods, but also the bar of incomes of the population, so as not to undermine both the authority of government organizations and the value of the currency as a whole.