Page 92 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 6: Economic Fundamentals and Foreign Exchange Risk Exposure

Consumer Price Index (CPI); Notes
GNP Deflator;
GDP Deflator;
Employment Cost Index (ECI);
Commodity Research Bureau’s Index (CRB Index);

Journal of Commerce Industrial Price Index (JoC).
The first four are strictly economic indicators; they are released at specific intervals. The
commodity indexes provide information on inflation quickly and continuously. Other economic
data that measure inflation are unemployment, consumer prices, and capacity utilization.
(a) Producer Price Index (PPI): Producer price index is compiled from most sectors of the
economy, such as manufacturing, mining, and agriculture. The sample used to calculate
the index contains about 3400 commodities. The weights used for the calculation of
the index for some of the most important groups are: food - 24 percent; fuel - 7 percent;
autos - 7 percent; and clothing - 6 percent. Unlike the CPI, the PPI does not include imported
goods, services, or taxes.
(b) Consumer Price Index (CPI): Consumer price index reflects the average change in retail
prices for a fixed market basket of goods and services. The CPI data is compiled from a
sample of prices for food, shelter, clothing, fuel, transportation, and medical services that
people purchase on daily basis. The weights attached for the calculation of the index to the
most important groups are: housing - 38 percent; food - 19 percent; fuel - 8 percent; and
autos - 7 percent.

Notes The two indexes, PPI and CPI, are instrumental in helping traders measure
inflationary activity, although the Federal Reserve takes the position that the indexes
overstate the strength of inflation.

(c) Gross National Product Implicit Deflator: Gross national product implicit deflator is
calculated by dividing the current dollar GNP figure by the constant dollar GNP figure.
(d) Gross Domestic Product Implicit Deflator: Gross domestic product implicit deflator is
calculated by dividing the current dollar GDP figure by the constant dollar GDP figure.
Both the GNP and GDP implicit deflators are released quarterly, along with the respective
GNP and GDP figures. The implicit deflators are generally regarded as the most significant
measure of inflation.
(e) Commodity Research Bureau’s Futures Index (CRB Index): The Commodity Research
Bureau’s Futures Index makes watching for inflationary trends easier. The CRB Index
consists of the equally weighted futures prices of 21 commodities. The components of the
CRB Index are:
Precious metals: gold, silver, platinum;.
Industrials: crude oil, heating oil, unleaded gas, lumber, copper, and cotton;.
Grains: corn, wheat, soybeans, soy meal, soy oil;
Livestock and meat: cattle, hogs, and pork bellies;.
Imports: coffee, cocoa, sugar;.

Miscellaneous: orange juice.

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