what is commodity price index and how is it calculated?

Answer 1

More than likely, you meant to ask the meaning of Consumer Price index. It is calculated by taking a "basket" of goods and comparing the cost this year of that basket with what it would have cost some other year.

If you intended to ask the meaning of the lesser-known commodity price index, than a look it the following site is in order.

http://www.economist.com/finance/displayStory.cfm?story_id=3651836

It seems to me that this index takes a basket full only of commodities (non-distinguishable consumables like oranges, oil, and coffee beans), and compares them year to year in Real terms. In other words, factoring out inflation, it calculates the cost of these goods from one year to the next.

Answer 2

Let me start at the end, with calculation...

First, you figure out what commodity basket you want to track. Say, your basket includes 10 barrels of oil and an ounce of gold. You look up the current market prices and value your basket. For example, if today oil is $50/barrel and gold is $500/ounce, your basket at today's prices is worth ($50 * 10 + $500) = $1,000. This will be your base value. Tomorrow, prices will be different, so you will value your basket again and state the price as a percentage of base value. Say, oil is up to $53, while gold is down to $480, so your basket will be worth ($53 * 10 + $480) = $1,010. Since $1,010 is exactly 101% of the base value, you will report your index as 101.00.

Real-world commodity price indexes, of course, include way more than two commodities. Goldman Sachs Commodity Index, for example, includes six energy commodities, five industrial metals, two precious metals, eight agricultural commodities and three kinds of livestock:

http://www2.goldmansachs.com/gsci/

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