Economics students have to deal with lots of indices and charts. Producer price index is one such index which they are required to study.
What is producer price index?
Producer price index is the index that measures the changes in prices received by domestic producers of goods. It analyses price changes from the point of view of producers of goods. This index takes into account only the wholesale price or price of goods before it reaches the final consumer. Economics students need to master producer price index homework answers as it forms an important part of their study.
Calculating producer price index or PPI
PPI compares the average prices of a fixed basket of goods over a period of time. For calculating this index, one year is selected as the base year. For the base year, every product of groups of products will be allocated the base index number of 100. All future movements in prices will be measured against this base.
If a product shows an index of 120 in a year, it means that the price for it has risen by 20%. Currently, 1980 is used as the base year for most industries. The calculation is very important for economics students as it will help them with producer price index homework answers.
Classification of PPI
Producer price index can be broadly classified into three based on the area under consideration.
- Industry based classification:
In this, changes in prices are considered for an industry as a whole. This index measures the changes in the net output of an industry. It helps to ascertain the growth or decline of various industrial sectors.
- Commodity based classification:
Here, the changes in average prices of individual commodities are considered without regard to industrial output.
- Final demand-intermediate demand classification:
This is a new addition to commodity based classification, where the commodities are further regrouped into classes. This categorisation of goods is done on the basis of stages of processing or assembling done on the goods.
Significance of producer price index
PPI is an important topic as it has varied uses in various sectors of economy. Understanding its significance is mandatory for students to do well in producer price index homework answers.
- PPI helps to reduce the risk of uncertainty in economic world by predicting price movements.
- It is an indicator of inflationary trends in economy. It helps governments to monitor inflation.
- Is helps in cost accounting decisions by providing a yardstick to measure price variations.
- All international organizations like IMF and OECD need this index to decide on policies.
- It is a major analytical tool for economic researchers.
- It is used by companies to compare their growth rates with that of other companies.
Difference between PPI and Consumer price index
Producer price index and consumer price index are both indicators of average changes in prices of commodities. But there are differences between the two.
- PPI deals with price changes from the point of view of producer, whereas CPI measures from the perspective of final consumer in retail
- As PPI aims to measure output variations of only domestic producers, imports are excluded from producer index. But imports are included in consumer index.
- In calculating PPI, sales and excise taxes are not considered as they are not income for producers. In CPI these are included as consumers have to pay all taxes on goods from their pockets.
- Producer price index includes exports also, whereas they are excluded in consumer price index.
- Services provided as not entirely covered in PPI. In CPI most of the services are included.
- Measuring PPI is essential for gauging industrial growth. But CPI is mainly used for measuring increase in cost of living.
For performing well in producer price index homework answers, students have to learn these differences.
Selecting products and producers for calculating index
PPI is calculated for almost all industries. Producers from a particular industry are selected on the basis of systematic sampling techniques from the list of establishments that file with Unemployment Insurance System.
Sometimes other public records are also used to decide on producers to be included in survey. Generally, the chances of a firm being included in survey depend on number of its employees. After producers are selected, their consent to participate is obtained. Then the data collection process is initiated.
Collecting data for measuring PPI
As future economists, students have to understand how and where to collect data required for calculating producer price index. First, an establishment is selected for evaluation. Economists visit the establishment to decide about the goods for which data will be supplied.
The data is passed on condition of strict confidentiality. Once fixed, data will regularly be provided, usually once in a month. Data thus obtained from various establishments is tabulated to calculate PPI.
Seasonal adjustments of PPI
The Bureau of Labor Statistics publishes producer price index periodically. Sometimes the index is adjusted to allow for seasonal changes. These adjustments are done to analyze short term and medium term price changes. Short term changes may occur in prices of commodities due to various factors such as:
- Seasonal discounts in prices
- Discounts due to holidays and stock clearance
- Production changes due to weather factors
- New models arriving in market
A student of economics has to be conversant in the various factors affecting producer price index so that their knowledge base is strong.
Dealing with producer price index homework answers
Knowing how to calculate PPI and understanding its uses is essential for economics students at university level. An economist is expected to have clear information about these economic indicators. With some effort, they can be proficient in these topics.
- Learn formulae:
Calculation of PPI is a complex procedure involving use of formulae. First step by the students should be to understand and memorize this formula. Once this is done, the rest of the path is easy.
- Practise lessons:
This applies not only for practical problems but for theoretical aspects also. Learn and practice all concepts as vividly as you can.
- Get extra help:
When in doubt about producer price index homework answers, do not hesitate to seek help. It could be from your teachers or friends. These days, there are lots of professional homework help websites which are ready to provide help to students. They give all assistance you need in record time.
The biggest advantage of resorting to online help is that the students can be assured of hundred percent accuracy within the time limits.
Apart from all these, make it a point to read all important economic publications. They contain lots of information useful for economics students. Keeping abreast of all changes in economic scenario is the key to becoming a successful economist.