Thursday, September 27, 2012

Beyond the Numbers: What Do Prices Tell?

While I was reviewing the classic work of George Stigler on the evolution of distribution theory which has been a landmark in the history of economic thought, I was motivated to write sort of a sequel to my previous article which focused on Consumer Price Index (CPI). Thus, the centerpiece of this issue is a relevant topic that has something to do with price: the Producer Price Index (PPI).
In his article titled "Some Recent Developments In The Theory Of Production", Robert M. Solow of the Massachusetts Institute Of Technology stressed that "mainstream economic theory assumes that firms seek to maximize profits. Production theory, then, asks what combination of inputs (known as factors of production) will generate the quantity of output that yields maximum profit." On the other hand, we can also relate to the dominant production theory in use today, the transformation theory, which is based on input, process and output (IP0). According to Koskela "this theory seeks to optimize the entire production phase by optimizing each individual task, assuming that minimizing the effort and cost of each task translates directly to maximum throughput and customer value."
These theories and the rest of the theories are very interesting and may have many implications. However, what is more interesting is to know what Producers Price Index (PPI) measure and what implications does it offer .
The Producer Price Index (PPI) measures average changes in prices received by domestic producers for the sale of their output. This is generated by the National Statistics Office through the results of the Producers Price survey (PPS) conducted nationwide.
According to the preliminary results, the Year- on-year growth of the Producer Price Index for the manufacturing sector shows a decline when it slowly decreased to - 0.3 percent in July 2012 from -2.2 percent in June. As indicated in the report, this could be traced to the double —digit decrements posted by furniture and fixtures (-42.6°/0).The other side of the picture, however, shows six major sectors that posted increases headed by rubber and plastic products.
Looking at a month-on -month growth ,the PPI slowly improved to -0.8 percent in July 2012 from -2.0 percent in June 2012. As indicated in the report, Furniture and fixtures led the eleven sectors with a double-digit downtick recorded at -17.9 percent. On the other hand, five sectors posted increases led by petroleum products (4.5%).
Going back to the concept on input costs… output prices, we can infer that changes in PPIs reflect what actually is occurring with prices charged to buyers from month to month, thereby making PPIs a significant price measurement tool for researchers, policymaking and business purposes.

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