Commodity price indices: A historical and methodological review

Abstract

Commodity wholesale price indices are relatively new, most of them having originated since 1945. A comparative review of ten major indices shows that their coverage varies according to the objectives of the compilers. International organizations stress commodities whose price movements affect the balance of payments of developing countries; other indices focus on the import bills of developed countries and trading profits. Most major indices are base weighted. To maintain sensitivity to changing market conditions, the weights should be changed periodically.

Developing countries export commodities that are different from those of developed countries, with different associated price movements. Thus, it is desirable to construct separate indices for the two groups. With rapidly changing conditions in the oil market, energy products should be shown separately. The computation formula should be a geometric average in order to avoid the effects of extreme price movements. Under floating exchange rates, an index expressed in an appropriate basket of currencies such as the Special Drawing Right (SDR) is recommended.