Q. 1: If dollar weakens, oil price appreciates How?
Plz explain The Relationship Between
Oil Prices & Dollar ... If dollar weakens , the oil price appreciates...
How?
Lets say today 1$=50 Rs and price of one barrel of oil is 100$.
Means, if you sell 1 barrel of oil, you get 100$ (or 5000 Rs.)
so by selling 1 barrel, you can buy stuff worth 5000 Rs. from Indian market
But next week, dollar weakens and it stands at 1$=40Rs.
If you still sell your one barrel @100$ then you can buy stuff worth
Rs.4000 only. So what should you do to keep your profit margin same?...Obviously
increase the price of 1 barrel of oil to 125$. (because $125*40=5000 Rs.)
In short, dollar has weakened, means its purchasing power has declined in the international market. Now you can buy less stuff from Chinese, European or Indian market using that 1 dollar compared to earlier times, when Dollar was stronger.
Since you're selling your barrel in the dollar currency, you must increase the price of your oil-barrel to maintain your profit margin and standard of living the same. (else you'll have to cut down on your expenses like the chauffeur for your limo or the number of workers in your oil-well.)
Lets say today 1$=50 Rs and price of one barrel of oil is 100$.
Means, if you sell 1 barrel of oil, you get 100$ (or 5000 Rs.)
so by selling 1 barrel, you can buy stuff worth 5000 Rs. from Indian market
But next week, dollar weakens and it stands at 1$=40Rs.
If you still sell your one barrel @100$ then you can buy stuff worth
Rs.4000 only. So what should you do to keep your profit margin same?...Obviously
increase the price of 1 barrel of oil to 125$. (because $125*40=5000 Rs.)
In short, dollar has weakened, means its purchasing power has declined in the international market. Now you can buy less stuff from Chinese, European or Indian market using that 1 dollar compared to earlier times, when Dollar was stronger.
Since you're selling your barrel in the dollar currency, you must increase the price of your oil-barrel to maintain your profit margin and standard of living the same. (else you'll have to cut down on your expenses like the chauffeur for your limo or the number of workers in your oil-well.)
Economy Q. 2: Base year and Current year price? How to
calculate WPI and CPI?
I've come across these terms numerous times, but couldn't make
anything out.
What's all these about Base year prices and Current year prices while calculating economical statistics?
Tell me what is inflation? .
It's the increase in the price of a product .
How can you say there is inflation? .
What's all these about Base year prices and Current year prices while calculating economical statistics?
Tell me what is inflation? .
It's the increase in the price of a product .
How can you say there is inflation? .
Because, earlier in the year 2001, we could buy a litre of petrol
for Rs.50, but now it's Rs.70/- per litre. So there is price-rise and hence
there is inflation .
Means you need to compare the current price, with some old price to say that the price has increased (or decreased), right ?
Hence, to calculate the inflation (CPI,WPI) we'll need to compare the price of some item for two different years.
Suppose Price of a lifebouy soap was Rs.10 in 2001. And now it has increased to Rs.12 per bar. So what is the % increase?
[(12-10)/10]*100=20% incrase in the price of a soap.
Means you need to compare the current price, with some old price to say that the price has increased (or decreased), right ?
Hence, to calculate the inflation (CPI,WPI) we'll need to compare the price of some item for two different years.
Suppose Price of a lifebouy soap was Rs.10 in 2001. And now it has increased to Rs.12 per bar. So what is the % increase?
[(12-10)/10]*100=20% incrase in the price of a soap.
What did we do, in above formula?
We took 2001 is the base year and 2011 is the current year. Then
we divided the change in price, with the price of base year and multiplied it
with 100 to get the percentage .
If price of a soap was Rs.1 in 1950s (don't get excited because
in those days, monthly income of most middle-class people was around 100-300
Rs, so one rupee was a big amount.)
So with 1950 as base year, what'll be the % price increase?
[(12-1)/1]*100=1100% increase in the price of a soap!
But does it make any sense to calculate inflation with such an old base year? Ofcourse not, because lot things have changed after 1950, including the salaries of the middle class people. So you won't get the real picture.
Inflation is a 'hurt-meter'. You cannot fathom how much it hurts now, if you didnot feel less pain earlier. Those who lived in 1950s are all either dead or retired. And the current-working population never actually bought a soap for 1 rupee. So how much is the soap price hurting the current-population, to know that answer, you need to set the hurt-meter to compare the prices of recent memory: oh yeah back in 2004 it was only 10 rupees and now it's 12 so yes I can feel it hurting me .
Morale of the story: We need to have the base-year at some near-past level like 2004-05 to get the real picture of inflation. (Earlier this base year was about 1993-94) .
So with 1950 as base year, what'll be the % price increase?
[(12-1)/1]*100=1100% increase in the price of a soap!
But does it make any sense to calculate inflation with such an old base year? Ofcourse not, because lot things have changed after 1950, including the salaries of the middle class people. So you won't get the real picture.
Inflation is a 'hurt-meter'. You cannot fathom how much it hurts now, if you didnot feel less pain earlier. Those who lived in 1950s are all either dead or retired. And the current-working population never actually bought a soap for 1 rupee. So how much is the soap price hurting the current-population, to know that answer, you need to set the hurt-meter to compare the prices of recent memory: oh yeah back in 2004 it was only 10 rupees and now it's 12 so yes I can feel it hurting me .
Morale of the story: We need to have the base-year at some near-past level like 2004-05 to get the real picture of inflation. (Earlier this base year was about 1993-94) .
Now lets get a lil technically correct, above post was written to
clear the basic concept of base year and current year only, the CPI and WPI are
not calculated so straight-forward.
Economy Q. 2: How to calculate the WPI or CPI?
Price of a bike was 30,000 in 2004 and now its close to 55,000/-.
Price of one litre milk was 25 Rs. in 2004 and now it is almost 60/- (After Sharad Pawar advised all the dairies to buy an alarm, which rings at paheli taarikh every month to remind them to increase the price without fail)
So, What hurts to you more, or what hurts the people at large: bike price or milk price? ofcourse the milk price inflation because you need to buy it every day.
So when calculating the inflation, you need to 'weight' the products according to their usage.
Price of one litre milk was 25 Rs. in 2004 and now it is almost 60/- (After Sharad Pawar advised all the dairies to buy an alarm, which rings at paheli taarikh every month to remind them to increase the price without fail)
So, What hurts to you more, or what hurts the people at large: bike price or milk price? ofcourse the milk price inflation because you need to buy it every day.
So when calculating the inflation, you need to 'weight' the products according to their usage.
The weightage given in WPI
Itis something like this
1. Primary Articles (food,fruits etc):22%
2. Fuel, Power, Light & Lubricants :14%
3. Manufactured Products (biscuit,toothpaste):63%
Now survey the prices of all items in the base year and in the current year. Then you plug them in the Lesperes Formula for weighted arithmetic mean. (Formula is not important, but what is important for you to know is, that it is not a simple average but a weighted average)
And you get a number, we call it the WPI index number for the given year or given week or given month.
Suppose after calculation you get a number 110 on 1st August 2011.
For base year we assume that WPI is 100.
So there is 10% inflation.
i.e. [110-100/100]*100
Now on 1st September 2011, you calculate again with new price data and the number is 112. What does that mean? The inflation has increased by 12% compared to compared to base year AND inflation has increased by 1.8% compared to last month. i.e. (112-110)/110*100
1. Primary Articles (food,fruits etc):22%
2. Fuel, Power, Light & Lubricants :14%
3. Manufactured Products (biscuit,toothpaste):63%
Now survey the prices of all items in the base year and in the current year. Then you plug them in the Lesperes Formula for weighted arithmetic mean. (Formula is not important, but what is important for you to know is, that it is not a simple average but a weighted average)
And you get a number, we call it the WPI index number for the given year or given week or given month.
Suppose after calculation you get a number 110 on 1st August 2011.
For base year we assume that WPI is 100.
So there is 10% inflation.
i.e. [110-100/100]*100
Now on 1st September 2011, you calculate again with new price data and the number is 112. What does that mean? The inflation has increased by 12% compared to compared to base year AND inflation has increased by 1.8% compared to last month. i.e. (112-110)/110*100
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