The price index is the basis for assessing welfare. History of the concept development, types, calculation and features

The price index is a weighted indicator that characterizes the market value of a certain group of goods or services in a particular region over a period of time. The cost-of-living ratio characterizes the state of the national economy. This is the so-called general price index. Narrower in scope indicators help entrepreneurs make investment decisions. All these coefficients are calculated by the national statistical agencies of most modern states, including Rosstat. The consumer price index is the most famous of them. In this article, we will review the history of the development of this concept, the types of indicators, their calculation and application features.

Definition of the concept

The price index is a statistical relative value. It is used to compare the dynamics of the market value of groups of goods and services in time and geographic space. The methodology for calculating this indicator begins with the selection of a representative sample and the selection of the formula. There are three main indexes: the GDP deflator , consumer and industrial prices.

History of the concept development

Among economists, there is no consensus on who invented the first price index. This is not surprising, because there are many specialists in this field. Many refer to the study of Rice Vaughan's Discourse of Coins and Coinage. His work was published in 1675. The author wanted to separate the inflationary influence of the influx of precious metals into Spain from America from the effect of damage to coins. Vaughan compared the labor statutes of his time and the period of Edward III, in which the levels of hourly wages were fixed. The Welsh economist believed that for them it was possible to buy approximately the same set of goods. Vaughan's study showed that the level of prices in England over the previous century grew by 6-8 times. However, it did not directly calculate the growth rate.

The first price index was calculated by the English economist William Fleetwood in 1707. He was approached by an Oxford student who could lose his scholarship because his annual income exceeded five pounds. This condition was adopted in the 15th century. Fleetwood's sphere of interest included price changes, so he had at his disposal a huge amount of statistical information on this issue. He proved that over the past 260 years, the value of five pounds has changed significantly. His findings he published anonymously, but his study greatly helped Oxford students.

The Laspeyres index

The most important for most people is the growth of consumer prices, which characterizes inflation. This indicator is based on a fixed basket of goods and services. It is a kind of Laspeyres index, since it uses base year prices. Let Q ₀ be the output level of the base year. Also it can be the necessary quantity of goods in the consumer basket. A P ₀ and P ₁ - price levels in the base and current period. Then the CPI formula will look like this: Σ (Q ₀ × P ¹ ) Σ (Q ₀ × P ₀ ). The main problem with using this indicator is that it does not take into account changes in the structure of expenditures. It reflects only the income effect, ignoring the possibility of substitution. Therefore, the consumer price index often gives an inflated rate of inflation with an increase in prices and an underestimate - if they fall.

The GDP deflator

Another indicator that characterizes the state of the economy is the Paasche index. It is based every time on a new consumer basket or release level. Let Q ₀ and Q ₁ - the volume of production in the base and current period, and P ₀ and P ₁ - the price levels corresponding to the given time frame. Then the GDP deflator formula will look like this: GDPdeflator = Σ (Q ₁ × P ₁ ) Σ (Q ₀ × P ₀ ). This indicator can also be calculated by dividing the nominal gross domestic product by the real one. The main problem of this indicator is that it often underestimates inflation where the consumer price index gives it an overestimated characteristic, that is, with an increase in prices.

The averaged value

To eliminate the shortcomings inherent in the two previous indicators, another price index was invented. This was done by American economist Irving Fisher. He proposed to calculate the average geometric value, that is, the square root, from the product of the Laspeyres and Paasche indices.

Rosstat: consumer price index

According to the Federal State Statistics Service, the situation in the economy began to level off. In January 2016, consumer prices increased by 9.8%, in the same month of 2015, their growth was 12.9%. Less this figure was only in November 2014. On average, the consumer price index in Russia for the period of independence was 137.42%. The lowest he was in April 2012 - 3.6%. Record high price index Rosstat recorded in December 1992, 2333.3%. When calculating this indicator, the Federal State Statistics Service takes into account such categories as food and non-alcoholic beverages (30%), transport costs (14%), clothing and footwear (11%), rent (11%), recreation and entertainment (6%) .