THE weekly sensitive price index, to which there has been frequent reference in both the Weekly Letters and this REVIEW, was designed as an aid in forecasting intermediate fluctuations in business.' The series selected, therefore, were those which were found to be most consistent in anticipating such intermediate movements during the years upon which the choice of prices was based (I923, I924, and I925) when compared with indexes of wholesale commodity prices and of the physical volume of production of basic commodities. A list of the series is given in the table on page 44. The constituents of the index are mainly raw materials for use in manufacture, and their prices are therefore responsive to industrial prospects. Furtfhermore, several of them are byproducts; the supply of such goods is relatively inelastic, and the price consequently especially dependent upon demand. Finally, the commodities as a whole are subject to wider influences than their small number would suggest, since most are important in international trade, and many are used in numerous industries. The index is an unweighted geometric mean of actual prices, relative to the average for I926 as base.2 The considerations governing the choice of such an average are quite different from those that are important in the construction of an index to measure purchasing power or to be used in studying the quantity theory of money. In the present case, the purpose directs attention to the timing and direction of changes, not to the general level of the index. The type of average follows from this fact and from the several assumptions that follow concerning the relationship between commercial fluctuations and prices. These assumptions are: first, that any given change in the conditions of demand and supply for any one of the commodities has an influence that is relative to the price of the commodity at the moment; and, second, that the various commodities are of equal value for the purpose of the index. The index has been computed weekly, and is designated as applying to the week ending Wednesday; the prices included are those datedwithin the week either prices for a given day or averages of daily prices for a seven-day period. The index for any month is obtained by averaging the weekly indexes for those weeks whose major part falls in the month in question. The computation of the weekly index is, of course, performed with the aid of logarithms; the logarithm of the base is subtracted from the average of the logarithms of the actual prices to obtain the logarithm of the index.3 The number of commodities used in the index is relatively small, so that there is at all times possibility of distortion resulting from extraordinary fluctuations in one of the constituents. For example, the exceptionally wide movements in the price of rubber (arising from causes peculiar to this particular commodity) have at times had considerable undesirable effect on the index. But it is probable that such temporary disturbances have at least during the period covered merely necessitated caution in the interpretation of the index, and not impaired its usefulness. The period for which the sensitive index is now available (I92I-3I) is sufficiently long to make fruitful some review of the success or failure of the index in accomplishing the purpose for which it was designed.4 From I923 through 1925 (the test period) its performance was, as is
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