Wholesale Price Index (WPI) | Meaning, Uses, Merits, and Demerits

What is Wholesale Price Index(WPI)?

The two most practical and widely used metrics used to assess market inflation in a country are the Wholesale Price Index and the Consumer Price Index. The WPI concentrates on the wholesale level, whereas the CPI concept concentrates on the retail level.

The Wholesale Price Index is an indicator that tracks changes in wholesale product prices. This index measures changes in the average price of commodities traded in bulk. Unlike the retail price at which individual customers purchase items from the market, the Wholesale Price Index (WPI) relies on the average price a trader needs to pay when purchasing items wholesale.

The relative variations in the pricing of goods traded in wholesale markets are measured by the Wholesale Price Index (WPI). The wholesale pricing index data in India are created on a weekly basis with 2011-2012 as the base year.

The reason for considering the wholesale price is that it is more readily available than the retail price. Since they can be verified, data gathered from wholesale dealers are also, more trustworthy than data collected from retailers. Most notably, the cost of obtaining a wholesale price is less expensive and also, more efficient in terms of time than the retail price index.

Commodity Group and Weightage of Wholesale Price Index:

All commodities in India have been categorized as follows:

Commodity Group	Name of Commodities	Weightage
Primary Articles	These include 117 commodities, like Rice, Fruits, Pulses, Vegetables, and Non-Food articles, like Cotton, Jute, Metals	22.26
Fuel, Power, Light, and Lubricants	These include 16 commodities, like Coal, Petroleum Products, LPG, and Electricity.	13.25
Manufacturing	Manufacturing includes 564 items, like Sugar, Paper, Leather, Machinery, Chemicals, Fertilizers, Textiles, etc.	64.23

How does WPI work?

Before the change needs to be calculated, a base year is chosen for the entire price of items released throughout the year. In India, the first year in a series of years is referred to as the base year. A set of criteria must be applied to determine the base year. It contains the following points:

1. The base year must have occurred during a stable economic period or a time of peace.
2. The year shouldn't fall within a business cycle.
3. There should be accurate price information accessible for that particular year.
4. The year should be recent and not already out of date when pricing is announced.

Typically, a recent year is used as the wholesale price index base year to reflect the shift more precisely. Comparing prices, changes are easily made when using the base year. Once the base year has been established, the cost for that specific year is multiplied by 100.
The total price of items for another year (referred to as the current year) is then totalled together and computed using the given wholesale price index method.

Formula of Wholesale Price Index (WPI)

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. 

Example:

Assume that the cost of products is ₹4,500 in the current year (2015). To determine the price change, consider 2010 as the Base Year. The base year's total cost of goods is ₹1,000. Calculate the WPI.

Solution:

WPI= \frac{4,500}{1,000}\times{100}

WPI= 450

The difference between the current year's WPI and the base year's WPI is 350 (since the base year's WPI is regarded as being 100 on the scale). 

Also, the WPI for the current year is 350%(2015).

Utility of Wholesale Price Index(WPI)

1. Forecasting Demand and Supply:

The demand and supply conditions in the economy are frequently predicted using the wholesale pricing indices. 

• Growth in the wholesale price index implies that there is surplus demand. It is an instance where supply is insufficient to meet demand.
• However, a drop in the wholesale price index indicates a demand deficit. In this instance, demand is less than supply.

2. Computation of Monetary Value and Real Value:

The real and monetary values of aggregates, like national income and expenditure can be calculated using the wholesale price indices. The worth evaluated at current-year prices is the economic value. The value determined at a base year or constant price is the real value. The following formula can be used to convert the monetary aggregate into the real aggregate:

3. Indicator of Rate of Inflation:

Inflation is defined as the rate at which prices are likely to increase over time. The wholesale pricing index is also used to estimate an economy's inflation rate. 

• An increase in the WPI signifies a decrease in the purchasing power of money.
• The WPI number helps determine the nation's inflation rate, which may be computed as:

The weekly inflation rate is given by:

(Where X_t and X_t-1 refer to the WPI for the t^th and (t-1)^th weeks)

The yearly inflation rate is given by:

4. Useful in Cost Evaluation of various projects:

The construction of large facilities, like airports and shopping malls is a long-term effort that will require significant future financial outflows.

• As prices rise over time, the project's initial estimated cost will also increase.
• The wholesale price index, which depicts the rate of inflation, must be taken into account when estimating the revised price.
• In order to determine the true cost of such initiatives, wholesale price indices are helpful.

For example, if the Wholesale Price Index for a year is 110. It means that the initial cost estimate for that year will need a 10% upward adjustment.

Merits of Wholesale Price Index

Various advantages of the Wholesale Price Index are as follows:

1. It represents the general development or decline of an economy, the causes of which can be discovered by undertaking micro-level analysis.
2. Most nations base their 5-year plans on inflation rates determined using the WPI.
3. It assists businesses in developing budgets that account for potential inflation.
4. The government can develop measures to enhance unproductive sectors and gain knowledge of different sectors to concentrate on and grow upon by comparing the products of various industries.
5. Industries can evaluate and compare their performance to that of other products and adopt industry-wide actions to develop and advance.

Demerits of the Wholesale Price Index

Various disadvantages of the Wholesale Price Index are as follows:

1. WPI merely takes into account the effects of a small sample of the products that make up the whole population of goods. There is always a risk in doing business.
2. The weighted average-based inflation calculation may not be accurate because it represents the population as a whole.
3. The WPI is calculated using various goods by various nations. As a result, it cannot always be compared to other nations.
4. It is not a suitable standard for nations where the service sector plays a central role.