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Session 2.2. Elements of Price Analysis. PAT. Learning Objectives. By the end of this session, participants should be able to: Explain use of CPI & its potential to underestimate extent of real food price increases

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session 2 2 elements of price analysis

Session 2.2.Elements of Price Analysis

PAT

Price Analysis Training

learning objectives
Learning Objectives

By the end of this session, participants should be able to:

  • Explain use of CPI & its potential to underestimate extent of real food price increases
  • Explain the implications of using nominal vs. real prices for analyzing household food security
  • Analyze graph of nominal & real food prices & identify implications for HH food security of any changes
  • Calculate real prices of particular good in the country based nominal prices and the CPI

Price Analysis Training

reminder why prices are important to wfp
Reminder: Why prices are important to WFP
  • Prices provide key to understanding market behavior
  • Costs & price differences along marketing chain - from farmer to consumer - indicate where markets may be weak, failing or functioning well
  • Market performance: analyzed mainly through price analysis

Price Analysis Training

slide4

What is reality?

But…

…to understand market reality, it is important to be understand what a real price is.

Price Analysis Training

nominal vs real prices
Nominal vs. Real Prices

Nominal price:

  • denotes current monetary value of good/service (as observed by monitor in shop, at market stall)
  • Changes determined by:
      • Inflation
      • Seasonality
      • Cycles
      • Production trends
      • Stochastic factors

Real price (PR):

  • Nominal price (PN) adjusted by a price index of a basket of other products (I)
  • PR = (PN/I)
  • Important to use real prices when inflation is high (i.e. high spread between nominal & real prices)

Price Analysis Training

aspects of market price analysis the consumer price index cpi
Aspects of Market Price AnalysisThe Consumer Price Index (CPI)…
  • Measures level of prices facing consumers. (Increase in overall level of prices is inflation)
  • Expresses cost of market basket of goods relative to its cost in a base period.
  • Based on budget of typical urban family (in most countries)

Price Analysis Training

constructing the cpi
Constructing the CPI

Basket of goods:

  • Typical basket of goods commonly purchased by HHs (e.g., grain, flour, other food items, drinks, fuel and energy, clothing, household goods, school fees etc…

Base year:

  • CPI is price of basket of goods & services relative to price of same basket in some base year

Food vs. non-food inflation:

  • Weights determine which good is driving general inflation

Price Analysis Training

aspects of market price analysis the consumer price index cpi1
Aspects of Market Price AnalysisThe Consumer Price Index (CPI)…

CPI2009

CPI in base year

=

Cost of market basket2009

Cost of market basket in base year

When constructing such index numbers, it is conventional to set the index at 100 in the base period. Thus:

CPI2009

100

=

Cost of market basket2009

Cost of market basket in base year

Resulting in:

X 100

CPI2009

=

Cost of market basket2009

Cost of market basket in base year

Price Analysis Training

aspects of market price analysis understanding the cpi
Aspects of Market Price AnalysisUnderstanding the CPI…
  • Suppose: 2009 CPI is equivalent to “143.5”
    • Simply means: In 2009 it costs 143.5 currency units (francs, dollars, dinars, etc.) to purchase the same market basket of goods & services that cost 100 currency units in the base year

Price Analysis Training

quick quiz
Quick Quiz

Answer:

6300

2100

X 100 = 300

  • A WFP monitor finds the cost of a market basket in December 2009 costs 6300 francs.
  • In 2000, the base year, the cost of the same basket was 2100 francs.
    • What is the CPI in December 2009?

X 100

CPI2009

=

Cost of market basket2009

Cost of market basket in base year

Price Analysis Training

aspects of market price analysis understanding the cpi1
Aspects of Market Price AnalysisUnderstanding the CPI…

In absence of inflation:

  • Value of money stays constant over time. Therefore, it is easier to compare prices over time

In presence of inflation:

  • Prices need to be adjusted for inflation to enable comparison in constant money terms over time – to determine whether consumers are better off – or not

Price Analysis Training

limitations of the cpi to be aware of
Limitations of the CPI to be aware of…

The CPI is…

  • not easy to calculate
  • available only as secondary data.
  • usually not available regularly (e.g., on a monthly basis) or at geographical level
  • CPI does not take into account all items in the economy.

If available it is better to use the GDP deflator

Price Analysis Training

limitations nominal prices
Limitations: Nominal prices
  • Where high inflation disconnects price from real economy, economic agents do not consider nominal price as a relevant indicator for decision making
  • Nominal price can be manipulated by government or private actors (price control, speculation…)

Price Analysis Training

aspects of market price analysis turning nominal into real prices
Aspects of Market Price AnalysisTurning nominal into real prices
  • Formula translates non-comparable monetary figures into directly comparable real figures.
  • Same concept is used to analyze wages, to determine by how much purchasing power has been eroded by inflation (a reason to prefer real prices in market analysis)

Preal in 2009

X 100

Pnominal in 2009

CPI2009

=

Price Analysis Training

limitations real prices
Limitations: Real prices
  • Bias due to the use of inappropriate CPI to compute real price: use of annual CPI for monthly data or use of CPI from one region to compute real price in another region (ex: urban CPI for rural areas…).
  • If food item contribution to CPI is high, it induces downward bias in food real price – i.e., it underestimates extent of real price increase.

It is better to use a non food CPI

Price Analysis Training

quick quiz1
Quick Quiz

Answer:

1200

300

X 100 = 400

  • In December 2009, the WFP monitor visits the market and finds that the cost of one kg of maize at the market is 1200 francs
  • What is the real price of maize (using same December 2009 CPI of 300)?

Preal in 2009

X 100

Pnominal in 2009

CPI2009

=

Price Analysis Training

nominal vs real prices which deflator to use
Nominal vs. Real PricesWhich deflator to use?
  • Choice of deflator – of an index – is important: its construction depends on data availability for the index
  • CPI is not a good deflator if the concerned product accounts for a high % of index (then the real price will minimize the degree of relative price changes)
  • Using CPI requires a good knowledge of the composition of the basket
  • Using urban-based CPI to deflate a rural-based nominal price is not appropriate (due to different basket compositions and weights)

Price Analysis Training

nominal vs real prices which deflator to use1
Nominal vs. Real PricesWhich deflator to use?
  • If real price changes aim to inform production (not consumption) incentives, a better index is GDP deflator
  • Concerns:
    • CPI is not always appropriate
    • GDP deflator is rarely available on a monthly basis
  • Seasonal price indices should be constructed (more on this tomorrow…)

Price Analysis Training

implications for food security
Implications for Food Security?

Changes in maize nominal and real prices over time in Rwanda

What are the implications of the graph for HH food security?

Price Analysis Training

real and nominal maize price comparison
Real and nominal maize price comparison

2004 2005 2006 2007 2008 2009

What are the implications of the graph for HH food security?

Price Analysis Training

wages real wages

x = z

Wages & “Real” Wages

Quick quiz:

Purchasing Power in Marketastan

Dec 09 CPI: 300

Jan 09 CPI: 150

Dec 09 wage: 8 marks

Jan 09 wage: 5 marks

Are people really better off now compared with a year ago?

To determine if people are really better off this year compared with last (in terms of purchasing power):

  • Calculate  in CPI over the year
  • Calculate  in nominal wage over the year
  • Compare: Is 2 > 1? If yes, people are better off
  • Answer:
  • 1.  in CPI: (300 – 150) = 1.00 150
  • 2.  in Wages: (8 – 5) = .60 5
  • Compare: .60 < 1.00
  • i.e. real wages rose less than real prices
  • People are worse off

1. end-year CPI – begin-year CPI

begin-year CPI

2. end-year wage – begin-year wage

begin-year wage

Price Analysis Training

slide22

Small Group Work

Please turn to Workbook Exercise 2.2.a.

The Marketastan File: Wheat Price Trends in Marketastan

(use Excel data file: 4.1. Wheat IPP for Marketastan.xls)

Price Analysis Training

marketastan 2 2 a debriefing
Marketastan 2.2.a. Debriefing

Part I: Do you agree with southern politicians, that wheat prices are same in Northville as in other areas of Marketastan? That conditions in Central Province are better than in the south? Why?

Part II: Were people in Marketastan worse off by end- 2009 compared with 2008? 2007?

Price Analysis Training

wrap up interpretation and decision making
Wrap-up: Interpretation and Decision-Making

Interpretation

  • Price analysis informs supply: deficit/surplus status, seasonality of production, inflows and outflows of food
  • Complementary information needs:
    • Relative prices: in terms of livelihoods and geography
    • Inflation
    • HH income sources
    • Wage rates
    • Levels of income
    • Availability - food aid distributions
    • Market functioning
  • Contribution to decision-making:
    • Help determine potential/actual impacts of aid distributions
    • Help in formulation of early warnings
  • NOTE: Not stand-alone indicator: context is very important

Price Analysis Training