price index

Examples of price index in the following topics:

• Price Indices and the Rate of Change of Prices

  • A price index is a statistic designed to help compare how a normalized average of prices differ between time periods.
  • In order to calculate a price index, one must specify a base period and a basket of goods.
  • The Laspeyres index and the Paasche index are two price indexes that attempt to compensate for this difficulty.
  • The Laspeyres price index is (166/142)*100=116.9, giving an inflation rate of 16.9%.
  • Two common price indices are the Consumer Price Index (CPI) and the Producer Price Index (PPI).

• Measuring Inflation

  • The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index (CPI) The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer".
  • CPI is usually expressed as an index, which means that one year is the base year.
  • The index for another year (say, year 1) is calculated by $CPI_{year 1}=({Basket Cost}_{year 1}/{Basket Cost}_{base year}) * 100$
  • The price index is (212/207)*100, or 102.4.
  • The U.S. inflation rate is measured by comparing the price of goods in one year to the price of goods in a previous base year.

• Defining and Calculating CPI

  • The consumer price index (CPI) is a statistical estimate of the change in prices of goods and services bought for consumption.
  • The consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption by households.
  • The CPI can be used to index the real value of wages, salaries, pensions, and price regulation.
  • The graph shows the consumer price index in the United States from 1913 - 2004.
  • The x-axis indicates year, the left y-axis indicates the Consumer Price Index, and the right y-axis indicates annual percentage change in Consumer Price Index, which can be used to measure inflation.

• The GDP Deflator

  • The GDP deflator is a price index that measures inflation or deflation in an economy by calculating a ratio of nominal GDP to real GDP.
  • The GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
  • It is a price index that measures price inflation or deflation, and is calculated using nominal GDP and real GDP.
  • Like the Consumer Price Index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year.
  • The GDP deflator measures price inflation in an economy.

• Consumer Income, Purchasing Power, and Confidence

  • For example, if prices decline, consumers have greater buying power.
  • A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households.
  • It is one of several price indices calculated by most national statistical agencies.
  • A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
  • Illustrate the relationship between consumer purchasing power, pricing and the economy

• Purchasing Power Parity (PPP) Theory

  • Consequently, prices would converge to one price across all markets as traders shifted supply from the low-price market to the high-price market.
  • The high prices would fall while the low prices would rise over time.
  • Consumer Price Index (CPI) is a measure of a basket of goods in the United States.
  • The Economist publishes the Big Mac Index, based on the Purchasing Power Parity.
  • Finally, some analysts designed a Starbuck's Index similarly to the Big Mac Index.

• Settling the List Price

  • A list price must be close to the maximum price that customers are prepared to pay and yield the maximum profit for the retailer.
  • Pricing is a key variable in micro-economic price allocation theory and part of the four "P's-" of the marketing mix; pricing, product, promotion and place.
  • The manufacturer's suggested retail price (MSRP), list price or recommended retail price (RRP) of a product is the price which the manufacturer recommends to the retailer.
  • Value to the customer should be taken into consideration in addition to pricing objectives, profit maximization, geographic and buying habit considerations, discounting, rate of return, competitive indexing, the image conveyed by the price, customer price sensitivity, any legal restrictions, the category price points, price ceilings and floors and how payment is to be made.
  • A good pricing strategy is one that strikes a balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation).

• NASDAQ

  • The NASDAQ helped lower the spread (the difference between the bid price and the ask price of the stock), but paradoxically was unpopular among brokerages because they made much of their money on the spread.
  • A stock index or stock market index is a method of measuring the value of a section of the stock market.
  • It is computed from the prices of selected stocks, which vary depending on the index.
  • Thus "NASDAQ" can mean two things: either the stock exchange itself, or the index.

• Market Power

  • Such firms are often referred to as "price makers. " In contrast, firms with limited to no market power are referred to as "price takers. "
  • A monopoly, a price maker with market power, can raise prices and retain customers because the monopoly has no competitors.
  • A perfectly competitive firm, a price taker with no market power, cannot raise its price without losing its customers.
  • Measurement of market power is often accomplished with concentration ratios or the Herfindahl-Hirschman Index (HHI).
  • The Herfindahl-Hirschman Index (HHI) is a measure of the size of firms in relation to the industry, and an indicator of the amount of competition among them.

• Market Reporting

  • A stock index or stock market index is a method of measuring the value of a section of the stock market.
  • It is computed from the prices of selected stocks (sometimes a weighted average).
  • An index is a mathematical construct, so it may not be invested in directly.
  • Many mutual funds and exchange-traded funds attempt to "track" an index.
  • For example, the current market price per share, market capitalization, and trading volume are all readily available.