World Price Index

About the World Price Indexes (WPI)
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity, reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons.
Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate.
The World Price Index concept is designed to provide a timely and practical solution to the problems posed by international comparisons. It is intended for companies that transact across countries and currencies, for governments and for international non-governmental institutions.
The key difference between the World Price Index and other international PPP comparisons is the timeliness of the data. WPI figures are released the same month they are collected. This means WPI data is the most up-to-date exchange rate adjustment mechanism available.
Methodology
1. Sampling and Coverage Criteria
The WPI data are derived from tracking the price of a broadly based similar basket of goods (in local currencies) available across different countries. The 60+ items included in the World Price Index basket were chosen based on a number of different criteria. First, the items have been chosen so that a wide variety of categories of private consumer expenditure are represented. Further considerations included ensuring that prices are available from reputable online sources with regular price reviews, along with staple items are included as well as premium brands, and that local brand prices are averaged in cases where no intentionally comparable single brand can be used.

Countries: The WPI headline index has been calculated initially for the largest 15 countries in the world measured by GDP - the US, Japan and the UK, plus three Eurozone nations - Germany, France and Italy and the set of emerging markets known as the BRICs - Brazil, Russia, India and China. This list will be expanded over time but already covers over 60% of world GDP measured using ICP PPP data. The WPI converts six currencies - Sterling, the Euro, the Yen, the Real, the Rupee and the Renminbi into a common standard of international Dollars for comparing economic transactions in these currencies at PPP exchange rates.

Urban Bias: The WPI has an urban/large city bias. The WPI deliberately concentrates on traded consumer items available online that might not be found in the subsistence agricultural segments of large economies such as China and India. The assumption is that the basket of items available in London and Shanghai are related to those that could be bought in Moscow or Paris. This decision to focus on consumption in large urban areas should minimise the problems faced by broader based PPP measures as a result of the so-called Penn effect (discussed in the Technical Appendix.)
Public Services Excluded: The WPI basket concentrates on readily available consumer items and does not attempt to measure consumption of services often provided by the state such as health and education. This omission is deliberate and it arises from the severe problems and distortions faced in attempting to measure the price of government services by larger surveys such as the ICP.

2. Calculation
The World Price Index is simply an index of relative prices, one value for each country that reflects the amount of local currency needed to buy the same representative urban basket of items in each country as can be bought for exactly $1 in the USA. The range of items used in the World Price Index covers a broad base of sectors - food, beverages & tobacco, clothing & footwear, household goods & services, transport, communications, recreation & culture, restaurants & hotels and miscellaneous goods & services (which covers health, personal and non-personal care items). Fifty relative prices are used relating to each country, but in order to calculate a single basket price it is necessary to combine all relative prices to generate a single figure for each country.

Each item price is tracked in its local currency and combined into a three month moving average to smooth individual price anomalies; the resulting figure is then converted into PPP terms relative to the US prices.

All item prices are grouped into categories by taking the arithmetic mean of the available price data to create a category based price index in each country. The geometric average of the category indexes are subsequently taken to combine the categories to form a single monthly World Price Index figure for each country which is relative to the US dollar.
Sources / Notability
*Global Banking & Finance Review,
*CTV News, CTV News
*Brazilian Bubble Brazilian Bubble
*Huffington Post, Huffington Post
*Peer Review World Economic Journal, The Power of Price Indexes
*Digital Journal, Digital Journal
*ESOMAR,

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