Trends in the Dynamics of the Level and Correlation of the Producer Prices in Bulgarian Industry

Trends in the Dynamics of the Level and Correlation of the Producer Prices in Bulgarian Industry

Trends in the Dynamics of the Level and Correlation of the Producer Prices in Bulgarian Industry

Associate Prof. Svobodka Klasova,Ph.D.

The article represents the reflection of world credit and monetary policies, international prices, the depreciation of US currency, as well as other factors regarding the dynamics of the national prices of investing. The article also analyses the trends in the level and proportion of producer prices for each branch and sector of the economy, for each level of production (extraction – processing - finished goods), and for selected technological processing. In the context of the accelerated development of the economy, and the pricing systemin particular, the correlation between the producer and consumer prices (offinished goods), as well as the above mentioned correlations, are studiedin dynamically changing environment, rather than a static one. The results of this study show that the changes in the producer price level and proportion have an impact on the structure of Bulgarian industry.

Key words:producer prices, consumer prices, relative prices, price index, industry structure.

JEL: L 11

Introductory remarks

Although it is not especially emphasized in theory, the dual nature of price is a fact, pre-determined by its role in the economy and in marketing. On one hand, price, respectively the price system, is a tool forthe management of the economy. On the other hand, it is the object of marketing management. It is natural for the economist and the marketing specialist to analyze price from the perspective of its dual nature.

The theory and methodology of contemporary price formation are not sufficiently studiedyet, and even the existing analysis is often subject to scepticism and mistrust. Such a scepticism is due to the insufficient studies and analysis of prices at the macroeconomic level, as well as the lack of empirical research on prices and the related categories in the companies themselves.

The main goal of the practical analysis, conducted in the present article, is to demonstrate certain aspects of price analysis, the results of which can present valuable information for the making of macroeconomic forecasts on restructuring the economy. This information is not less important for making correct marketing price decisions, which is an integral part of the national economic system.

Thesis of the study: the changes in price levels and price proportions at factory level in the intermediary consumption can either stimulate or hinder the development of any manufacturing branch and influence the restructuring of the industry.

1. Theoretical and methodological issues of the research

The cause-effect relationships are a distinctive characteristic of economic systems. The latter encompass persons and groups which are interrelated through goods and services, which they sell or buy. Within a specific complex of technological processes, multiple transactions are being carried out, so that raw materials can be processed, the processedonescan be transformed into components, the components – into equipment; all these together put together form finished products. Prices are permanently present at each of these stages. They are present at the entry (purchase of resources), and at the exit (sale of manufactured goods). Hence, like in the human organism that cannot exist without blood pulsing throughout the arteries and veins, the economic organism cannot function without prices.

Therefore, prices are an element of economic systems; they serve as a linkto all componentsof a clock that is the market; they represent a mechanism for the regulation of these systems. Through their signals, information is being sent, and on the base of this information, “…persons and groups are being managed as subjects of certain fields of free decisions”[1]

In their role of a mechanism for regulation of the economic system, prices do not act in isolation one from another, but they are interrelated and dependent on each other. In other words, prices are a separate system, distinguishable within the economic system. Figuratively, they are a “system within the system”. An astonishing proof of this assertion is the inter-industry balance. When, for its preparation, the entry level information is set the price of the good produced at the previous vertical level that has been used for its production is also included in the price of each following (downstream) product. In the technological chain “ore – crude iron – steel – profiles” for example, the cost of ore used for production of crude iron is calculated in its price - evaluated in correspondence with the price of crude iron.; the price of crude oil is calculated in the price of steel; respectively the price of steel used for the production of profiles is calculated in their price. In addition, the prices of products coming from other technical chains are also included at each stage – fuel, electricity, equipment.

The price system is amazingly eclectic with vast price variations. This tropical jungle of unbelievably varied prices can be overseen if they are grouped in a certain way. We will not detail here the different ways of grouping;however our attention will be focused on those groups, which are important for the present study.

From the point of view of the marketing management of prices, they are differentiated in terms of types of consumption – intermediary and final consumption. The purchase and sale of investment commodities, which are part of intermediary consumption, are performed at prices of investment goods. When commodities go beyond intermediary consumption, their purchase and sale is already at consumer goods prices.

In marketing, the prices of investment goods are: producer prices, wholesale prices, and prices for distributors of such commodities; consumer goods prices are prices of final consumption[2].

The price level is the absolute magnitude or the amount of the price, and the proportions are ratios, by which a price can be compared to another price. In theoretical and applied macro- and microeconomic aspects, it is of interest to study the proportions between producer prices of different industry branches, sub-branches and sectors of the economy, production layersand technological chains. The above mentioned proportions, as well as others, are not being explored statically, but in dynamics, because of the intensive rate of development of the economic and price systems.

The usefulness of the analysis of the dynamics of level and proportions of producer prices in terms of dimensions in the subsystem of investment prices (and in the overall price system) is predetermined by the expected results relative to:

§ The relative share of investment prices in final prices. The efficiently developing economies are distinctive for a lower or more slowly growing relative share of the intermediary production in their final production. As the two types of production are measurable in prices, it means a faster growth rate of the final consumer prices in comparison to producer prices.

§ The settled proportions between producer prices by industry branches, sub-branches and sectors, which signal, on one hand, where the investment of resources is more efficient and, on the other – illustrate the structural landscape of the industry, especially of manufacturing industry.

§ The structure of producer prices by production layers: mining industry – processing industry – produced finished products. The absolute producer price in the processing industry, for example, incorporates the price of the mining industry (vertically), and the prices in some of the sectors of the processing industry (horizontally). According to these prices, the material costs that are one of the elements of the prices in the processing industry are assigned value. The other element – this is the added value, consisting of an expense of labour with assigned value plus the profit of the participants in the processing industry. As for the producer prices of the finished products, there is a similar picture. Such development in producer prices, where the rate of growth of prices in the downstream layers is faster than in upstream layers is natural. If growth of prices in mining industry is faster than the rate in the processing industry, the relative share of material costs in the prices of the processing industry will go up at the expense of the added value. Such a trend would have a negative impact on the economic development of branches and sectors of the processing industry.

§ The structure of producer prices in the technological chain. Similarly to theabove said, the absolute price at each stage contains the price of the previous one and the value added, expressing the input of the participant in the respective production phase. A normal consequence of this objective economic phenomenon is that prices at the downstream stages of the technological chain grow up at higher rates than the upstream prices. In the opposite case, each successive participant in the chain would be a higher consumer and would contribute with a lower added value than at the previous stage, respectively a lower labour use and lower profit, which ultimately means a lower rate of return of the investments compared to the average price of capital.

Similarly, the growth rate of final consumption prices should be higher than producer prices at the intermediate stages of the technological chain.

Justifying the thesis suggested is not an easy task, since information about prices on the macro level is strongly aggregated. Moreover, the information is in absolute prices, but of price indices. Prices that are published in annual statistical surveys, bulletins, and other publications are aggregated, and cannot be compared by periods and used for analysis. Therefore, indirectly calculated data has been used for the study.

Essentially, producer prices of investment goods are not publicly announced, so that their indices are used as a basis. A more precise expression of economic relationships and interactions between prices, are the relative prices, used in the study.

The relative price indicates a proportion, as it is a price of a given commodity, measured in the prices of other commodities.

In the present study, indirect data obtained through indicesof producer prices are used for the analysis of relative prices.

2. Analysis of trends in the dynamics of levels and proportions of producer prices in Bulgarian economy

Producer prices in Bulgarian industry and their dynamics are strongly dependent on the stages of the world business cycle, which is a significant factor in the marketing economic environment. After 2001, the world economy is in the phase of “expansion” within the business cycle. This is demonstrated by the indicators of “Gross Internal Product” and “Trade” (Table 1).

Table 1. Growth of world Gross Internal Product and world trade for the period 2002-2005 in percentages

Indicators /Years / 2002 / 2003 / 2004 / 2005 (forecast)
World Gross Internal Product / 3,5 / 5,5 / 9,9 / 7,5
World trade / 2,8 / 3,9 / 5,0 / 4,2

Source: Economist intelligence Unit, The data are for 51 countries providing over 95 % of the World Gross Internal Product.

At the stage of “expansion”, the following events that influence demand, supply, and prices of goods and services, sold on the international and the national markets can be easily observed at the international level:

  • Credit policy, encouraging production and final consumption (through lower interest rates)
  • Monetary policy, carried out by the USA and the European Union, that artificially stimulates consumption mainly of long-term material commodities and of construction through lower interest rates;
  • Devaluation of the dollar, measured in commodities traded on international commodity markets.

The percentage changes of international prices of some raw materials in 2004 can be seen below (Table 2).

Table 2. Change of prices internationally traded commodities (in percentages with respect to the previous one)

Commodities / Month and year / 30.12.2003 / 27.01.2004 / 24.02.2004 / 30.03.2004
Industrial raw materials (except food), measured in dollars / 22,7 / 15,4 / 22,5 / 27,3
Metals, measured in dollars / 43,6 / 34,6 / 44,3 / 58,5
Metals, measured in Industrial raw materials / 17,0 / 16,6 / 18,0 / 24,5

Source: Industry Watch based on data from The Economist Commodity Price 1пdех, newspaper Capital, 17-23 April 2004

Compared to the same months of the previous year, prices of industrial raw materials in dollars have increased by 4,6% - from 22,7% in 2003 compared to 27,3% in 2004, and prices of metals in dollars had raised by 14,9% - from 43,6% in 203 to 58,5% in 2004. The growth of absolute prices in dollars of metals, which was faster than growth of other industrial raw materials, is reflected in their relative prices, measured in other industrial raw materials. It can be seen from the data in Table 2 that they grew by 7,5% - from 17,0% to 24,5%.

Changes in international relative prices of some commodities of the processing industry can be analyzed using the data in Table 3.

The relative prices of plastic products, measured in industrial raw materials, went down by 0,4% (10,2% - 9,8%), and of machines, measured in metals – by 1,2% (8,6% - 7,4%). The reason for this is the faster growth of the absolute prices of industrial raw materials and metals compared to those of plastic products and of the machines, in the production of which they have been used.

Table 3. Changes In relative prices of some commodities

(Inpercentages with respect to the previous year)

Commodities /Month and year / 24.02.2002 / 30.03.2004
Products of plastic, measured in industrial raw materials / 10,2 / 9,8
Machines, measured in metals / 8,6 / 7,4

Source: Industry Watch The Economist based on data from Commodity Price Index, newspaper Capital, 17-23 April 2004 (because of the highly aggregated commodity positions “products of plastic” and “machines”, the data is not absolutely exact).

Accordingly, in the conditions of a distinctive trend in international markets towards a faster growth of absolute prices of the basic raw materials, the relative prices of products at the upstream stages (in this case – the processing industry), measured in the respective raw materials, are going down.

The manifestation of the described trend of price changes in industry is typical for economies that are dependent on import of strategic resources like Bulgaria. Moreover, production in the country has a distinctively high resource-intensive character. Branches and sectors at the first upstream stages of the technological chain of production are with a lower relative share of material costs in the structure of total costs. Because of the multiplication effect of costs, for the next stages of the processing industry, as well as for manufacturing finished products, the relative share of material costs is higher, and the one of labour costs is lower. Therefore, these economic sectors are generally more strongly affected by high international prices of basic raw materials.

The changes in international relative prices of raw materials, traded on international markets, are reflected in producer prices in different branches and sectors of the economy (Table 4).

Table 4. Indexes of producerprices on the internal market of some sub-branches and sectors of industry for the period 2000-2004 (in percentages)

Branches and sectors of industry / Chain Indexes with respect to the previous year / Base index for 2004 with respect to 2000
2001 / 2000 / 2002 / 2001 г / 2003 / 2002 / 2004 / 2003
1. Mining industry, including:
101,6 / 105,6 / 113,7 / 109,4 / 125,6
а) Metal ore extraction. / 93,9 / 89,4 / 106,2 / 128,6 / 142,0
b) Extraction of non-metal minerals and raw materials. / 104,9 / 105,3 / 113,8 / 99,5 / 114,8
2. Processing industry, including: / 104,5 / 106,1 / 108,9 / 104,6 / 115,4
а) Products of other non-metal mineral raw materials. / 110,3 / 110,8 / 114,4 / 103,3 / 118,3
b) Production and casting of metals / 95,2 / 87,7 / 106,9 / 121,8 / 134,8
c) Production of metal products (except machines and equipment). / 102,9 / 102,3 / 105,6 / 110,1 / 115,7
d) Production of machines, equipment, and household appliances. / 112,1 / 111,5 / 112,8 / 103,7 / 116,5
e) Production of chemical products. / 116,1 / 116,9 / 120,6 / 109,0 / 130,4

Source: NSI,

The initial impression after looking at the data in the table is the faster growth of producer prices in mining industry compared to price growth in processing industry. Using 2000 as a basis, the price indexes in 2004 are, respectively, 125,6% for mining industry and 115,4% for the processing industry. In other words, the relative price of the products of processing industry, measured in products of mining industry, went down by 10,2%[3]. A similar trend can also be traced in the dynamics of chain indexes, which in the beginning of the period (2000) were higher (104.5%) than those of the processing industry (101.6%), but at the end (2004) they moved in the opposite direction and constituted 104,6% for and 109,4% for mining industry. Accordingly, relative prices of production of the processing industry, measured in those of the mining industry, went down by 4,8% in 2004, compared to the previous years.

In processing industry, the highest growth of producer prices in 2004, compared to 2000, was observed in production and casting of metals, where the basic index was 134,8%, followed by the production of chemicals – 130,4%, and the production of machines and equipment – 116,5%. That is to say, for 2004 compared to 2000, the relative prices went down as follows: for metals, measured in ore by 7,2% (134,8% - 142,0%); for metal products, measured in metals, by 19,1 (115,7% - 134,8%); for machines and equipment, measured in metals, by 18,3% (116,5 % - 134,8 %); for chemical products, measured in metals, by 4,4% (130,4% - 134,8%).

The line “iron ore – metals – metal products – metal-cutting machines - household appliances” has been selected to illustrate the influence of international prices of basic raw materials on the relative prices in the technological chain

The producer price indexes of the goods inside the technological chain also demonstrate their higher level. The base index (the base is 2000) for 2004 was up in all sectors, but with a slowing down rate at each stage. For the metals, the increase was 34,8%, for metal products – 10,1%, for metal-cutting machines – 3,7%, and for household appliances - 2,7%. Respectively, the relative prices went down as follows: for metal products, measured in metals by 24,7% ; for metal-cutting machines, measured in metal products - by 6,4%, and for the household appliances, measured in metals – by 1,0%.

The arguments in the analysis of the chain index for 2004 (calculated against the previous year) are analogous. The percentage change of relative prices for 2004, compared to 2000 was in the direction of decrease for almost all sectors. Accordingly, the relative prices of metals, measured in iron ore, went down by 19,92, the prices of the metal products, measured in metals – by 19,1%, and those of household appliances, measured in metal-cutting machines- by 18,2%.

Consequently, at different production stages in the technological chain, a faster rate of growth of the upstream producer prices compared to downstream ones is also observed, and respectively, the relative downstream prices measured in the products of upstream stages are going down.