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What is the Wholesale Price Index? Components and Working

  • Soumyaa Rawat
  • Jun 02, 2021
  • Financial Analytics
What is the Wholesale Price Index? Components and Working title banner

About Wholesale Price Index

 

An indicator that keeps a track of the change in prices of wholesale goods, the Wholesale Price Index is a variable value. Concerned with the price of commodities that are dealt with at the wholesale level, the construct of the Wholesale Price Index is a major determinant of an economy's inflation level. 

 

This index reflects on the change in the average price of goods that are traded in bulk. Unlike the price that is demarcated at the retail level wherein individual consumers purchase goods from the market, the Wholesale Price Index (WPI) focuses on the average price a trader has to pay when buying goods wholesale. 

 

Released by the Economic Adviser of the Ministry of Commerce and Industry, this financial index is different from the Consumer Price Index (CPI) which refers to a change of prices of goods purchased by consumers at the retail level. 

 

While the WPI focuses on the wholesale level, the concept of CPI focuses on the retail level. Wholesale Price Index and Consumer Price Index are the two most effective and common measures that are worked upon in order to determine the market inflation of an economy. 

 

When it comes to the working of this concept, the Wholesale Price Index has a particular formula that indicates the change in prices. But before that, we shall understand the working of this construct. 

 

(Must read: What is the Economic Calendar?)

 

 

How does the concept of WPI work?

 

For the total price of goods released in a span of a year that needs to be calculated, a base year is determined before the change has to be calculated. A base year in India is a year that comes first in a chain of years. 

 

In identifying the base year, a group of criteria is required to be administered. This involves the following points-

 

  1. The base year should belong to a peacetime or a stable era in terms of economic activities.

  2. The year should not belong to a period of business cycles.

  3. Reliable data on price should be available for that specific year.

  4. The year should be recent, it should not become outdated by the time prices are released

  5. The year for various economic factors should not be outdated. 

 

Usually, the wholesale price index base year is selected from a set of recent years that helps to reflect on the change more specifically.

 

The base year helps in comparing the change in prices. After that base year is determined, the total cost of that particular year is considered to be 100.

 

From here on, the total price of goods for another year (referred to as the current year) is added up and calculated with the help of the given wholesale price index formula. 

 

"The WPI is calculated using the Laspeyres formula, which measures the change in the cost of purchasing the same basket of items in the current period as was purchased in a specified earlier period." WPI formula

 

WPI=  (Current Price / Base Period Price) × 100 

 

Let us now understand this wpi formula with the help of an example. Suppose, the total price of goods in the current year (2016) is INR 3,500.

 

To calculate the change in prices, we consider 2010 as the Base Year. The total price of goods in the base year is INR 2,000. Now, with the help of this formula, we will calculate the WPI index. 

 

WPI = (3,500/2,000) × 100

WPI=  (17.5/10) × 100

WPI= 175

 

Since the base year's WPI is considered to be 100 on the scale, the difference between the current year's WPI and the base year's WPI is 75% (175-100). Thus, 75% is the WPI for our current year (2016).

 

(Must check: Capital in Economics)

 

 

Major Components of WPI

 

The total weight of the Wholesale Price Index involves a number of components of WPI that account for the items included in wpi in India. The total wpi weightage here refers to 100 that demarcates the value of WPI of a base year on the scale. 

 

  1. The first component involves Manufactured Goods. This category involves goods such as chemical and related products, metal products, raw metals, alloys, machinery, etc. The component of Manufactured Goods accounts for 64.9% of the total weight alone. 

  2. The second component focuses on the division of Primary Articles. Primary Articles account for 20.12% of the total weight. Primary Articles are further divided into:

  • Non-Food- Non-Food Primary Articles include minerals, cooking oil, fibers, cotton, and jute. 

  • Food- Food Primary Articles involve food materials like pulses, cereals, fruits and vegetables, dairy products, spices, and tea and coffee. 

  1. The third component focuses on Fuel and Power. This category accounts for a total of 14.91%. It accommodates goods such as kerosene, diesel, LPG, coal, and electricity. 

 

(Also check: What is Managerial Economics?)

 

 

Wholesale Price Index and Market Inflation

 

The construct of the Wholesale Price Index is a highly important one when it comes to market inflation and the economy of a specific nation. 

 

Helping to reflect on the change in the price of goods dealt in wholesale, WPI is considered to be a significant concept since it is frequently released, generally in a span of 2 weeks, with updated data derived from the ground. 

 

A market is a house of commodities that are sold to retailers who purchase goods in bulk. The price that is set for these commodities is determined by the Wholesale Price Index which reflects the market inflation (Inflation refers to an increase in market prices of goods and services that consequently lead to a decrease in the purchasing power of consumers). 

 

Considered to be a major factor in determining market inflation, WPI also has a role to play in almost all fiscal policies of a particular country.

 

The only concept that gives an insight into the change of price of goods on a weekly basis, WPI also influences the purchase and supply of raw materials and machinery and the service of construction work. 

 

All in all, the concept has been involved in influencing the market in all aspects. 

 

According to a report on the Relevance of the Wholesale Price Index published in 2021, although the Wholesale Price Index is a much-regarded concept in the field of economics, it has some drawbacks too that are as follows:-

 

  1. Primarily, WPI only focuses on goods and commodities that are purchased in bulk or wholesale. While it is a very important aspect, the concept does not include services that are an eminent part of a country's economy. Thus, it does not provide a holistic approach altogether.

 

  1. Secondly, the construct of WPI only reflects on the gross purchase performed by a nation's economy. None of the producers or consumers are involved in such a calculation which often gives an unjust idea of inflation of an economy. 

 

  1. Thirdly, this measure requires the government of an economy to revise the base year on a periodic basis while a country is rapidly evolving in terms of economic growth. This means that considering a specific year as the base year for a long time may lead to inaccurate information. 

 

However, the RBI decided to take a new approach for projecting market inflation in the year 2014. Perhaps a different concept of Consumer Price Index was replaced with Wholesale Price Index that has ever since then been the focus of calculating the inflation of an economy. 


 

The image is a flowchart that explains the difference between WPI and CPI.

Relation between WPI and CPI, Source


Not only this change has made economic growth more inclusive as it involves the purchasing power of the consumers also, but it has also been more accurate to calculate the Gross Domestic Product of a country's economy. 

 

 

Conclusion

 

To conclude, the Wholesale Price of Index is a concept that helps to determine a change in prices of goods or commodities that are purchased at the wholesale level. 

 

Involving a number of components that together indicate the level of market inflation in an economy, WPI is a useful and effective method when it comes to formulating fiscal policies and economic models. Furthermore, WPI has been in use since 1942. 

 

(Related blog: Elasticity of Demand and its types)

 

Even though it has taken a back seat in recent years after the RBI decided to focus more on CPI, the concept is still a significant model for evaluating economic growth and reflecting on economic trends. 

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