Anatomically the word market basket looks pretty self-explanatory. It means the market in a basket or to simplify it further, we can say that goods and services that a person avails from the market, are bundled together in a basket, and this bundling is known as a market basket.
What is a market basket, what is there is the basket, is it the same or different across all regions/economies and countries, and lastly how do these operate, are some of the important points that we will discuss in this article.
1. What is a Market Basket?
So, let’s begin with understanding more about market baskets. These are basically tools used by the government or economists to create a better and standard form of evaluation and approximation of the different segments of the market and even economies.
The range of products or services can and will obviously vary depending upon the region of operation, the habits of the people, and even the economic situation.
Usually, these will comprise housing, transportation, education, healthcare, apparel, and recreation.
The major use of these baskets is to calculate values like the Customer Price Index (CPI), the Producer Price Index (PPI), and the Home Price Index (HPI). With the help of these indexes, it is easy to evaluate the fluctuations in the market.
2. How do Market Baskets Work?
So, the working of market baskets is like a representative model. The goods and services are selected in such a manner that they represent the pattern of spending of a larger market segment.
So, for instance, in the broader category of education, we will include books, tuition fees, admission charges, and external educational resources like online courses or seminars/practical workshops.
And this again will not be static, with changing times the items on all lists will change as there will be the addition of newer products/services which will make the old ones obsolete.
Another angle to that will be the changing of the basket goods will also create a change in the value of the basket, so it will also be a variable figure.
Since the price of the total bucket will keep fluctuating based on the above-stated factors, you will actually have a good record created of the market basket values.
What needs to be kept in mind is that these values need to change, if they do not change they will become a little irrelevant.
The updation of prices and products should be done periodically without fail to actually have accurate data because imagine comparing a basket from 1987 and 2017. It will completely make the logic and the calculation look little to no use.
This record can be used to calculate indexes like the CPI, which is basically just the ratio of the cost of the basket in year X and X+1/X-1. The change in the index is in turn used to calculate the changes in the market as a whole and to calculate market changes like inflation.
3. Why are Market Baskets Important?
There are a lot of understandings and interpretations that can be gained by analyzing the market baskets, which is why these are very important, and some of them are listed below.
Firstly, they allow professionals to understand how exactly is a certain segment of the economy performing, which is then tuned down for layman’s understanding of the same.
If thorough studies are done, along with comparisons across years you will see that it helps to create a good understanding of consumer behaviour and other market trends like inflation, on a large scale.
This is because we observe an index. For instance, for CPI we will see that if the index is positive, it implies that the customer is happy to spend and is actually spending as he/she is confident in the economy.
So, other customer traits, behaviors, and spending trends can be analyzed and worked upon.
As you will have the information of the market and the customers also using the market baskets, this information can be used by the government to actually tweak changes in the monetary policies.
Retailers on the other hand can use the same information to bring necessary changes in their pricing.
Based upon what is trending in the market and what the customers are happy to spend on they can make changes in their operations.
4. Types of Market Baskets
There are basically three types of market baskets which are listed below and each of them focuses on different aspects of the market and helps you understand trends of the same.
They provide the values required for calculating different indexes which in turn help you create an understanding of the economy as a whole.
4.1. Consumer Market Basket
This is the most common type of basket, used usually to calculate the CPI. It is buyer-focused and is basically just a basket of goods/services helping to estimate consumer spending and other such trends.
As it is on a larger scale it helps to get an estimate of the cost of living and also helps to predict changes in the pricing and thus spending.
4.2. Producer Price Index Market Basket
A basket of goods/services with the primary motto of calculating PPI. These are focused on producers and production unlike the first one which focuses on consumers.
Using this you can study trends on the manufacturing end and pricing of goods.
4.3. House Price Index Market Basket
This is like the smallest market basket if we consider the above two as this actually calculates the values considering single-family changes limiting to not only countries but also states and zip codes.
The focus is on single-family homes and helps to estimate the fluctuations in the prices of homes/housing, mortgage payments, and rates along with the minimum affordability.
5. Final Thoughts
As we have seen above market baskets are basically collections of goods and services that are bundled to help build an estimate of market and consumers with the help of some indexes.
These can be used in various ways by retailers and even governments.