What Is a Trade Price Index?

A trade price index looks at information gleaned from a country’s imports and exports. The data helps a country determine the effects of inflation on internationally traded goods as well as any trade deficit or surplus. Economists need this information to determine how effectively a country handles the import of foreign goods, which can detail internal production. A trade price index is often a monthly or quarterly figure similar to other indices computed by economists. Preference is given to those indexes for single units in terms of imports and exports.

Countries tend to create specific groups of goods when computing a trade price index. Import groups may include all imports, fuel imports, and nonfuel imports. Fuel imports are important to separate out as few nations can meet their demands for energy or petroleum products, such as oil, gas, and natural gas. These prices may also be subject to more volatility due to the lack of supply in the world. Nonfuel imports then make up the other part of the total import trade price index when added to the fuel price index.

Exports also have their own basic groups inside of a trade price index. There is a single overall group and two subgroups: agricultural products and nonagricultural products. The difference with creating these groups occurs when a country provides grain, corn, or other food items as its sole or dominant export. In most cases, only large nations or those with an agricultural surplus can export these items. Other export groups may be necessary for countries with other types of goods.

Various technical computations exist for calculating a trade price index. One method is to select a base year on which all future inflationary calculations start. For example, a country may select the year 1990 as the base and compare all future trade prices to the figures in this year. In general, no thought is given to the exactness of goods in this calculation. The purpose is only to measure inflation — or deflation in rare cases — between trade prices during a current year and the base year.

A second type of inflation calculation looks at how the quality of a good has changed in terms of price. Inflation here can indicate the reason for a particular product’s price difference. Inflation may be the result of limited resources or supply and demand changes. The trade price index tends to work best in these types of calculations. One problem here, however, is the inability to receive constant updates as national economists may not release these figures often.