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13.1. Producer and Foreign Trade Price Indexes are compiled using the Laspeyres fixed weight approach. This involves six main stages each quarter:
13.2. Each of these stages involves numerous detailed steps. It is beyond the scope of this document to explain all the steps in detail, but a broad outline of each stage is given in the rest of this chapter.
Checking the prices collected
13.3. As soon as the price collection forms are received by the ABS they are checked for completeness and the reported data is loaded into the computer. The data is in the form of 'raw price elements' such as list prices, various discounts, transport charges, sales tax, etc. from which the transactions prices are calculated for use in the index.
13.6. Once the prices data have been verified, a price relative (or price movement from the base period) is calculated for each specification. This is a straightforward procedure which uses the formula:
Replacement of specifications
13.7. From time to time specifications have to be replaced either because the respondent is no longer able to provide a price, or because market conditions have changed and the specification is no longer appropriate (for example, a new model car being sold). The general procedure in these situations is to collect prices for overlapping periods for both the old specification and the new one. The new specification is 'spliced' into the sample in such a way that its price relative reflects only price movements and is not affected by the change in specification.
In period 1, the price relative for specification A would be calculated as:
13.10. This approach is equivalent to estimating a base period price for specification B using the assumption that the price movement from the base period to period 1 would have been the same as was recorded for specification A. That is, the nominal base period price for B:
Calculating fine level component index numbers
13.12. The price relatives calculated for each specification in the samples that comprise a fine level component are combined using the base period sample weights for that component. The resulting figure is the index number for the component. In accordance with the Laspeyres formula the weights used to combine the price relatives are value weights, i.e. the relative proportion of the total value of expenditure for the sample contributed by expenditure on each specification.
The component index number is 134.07, which is the weighted average of the specification price relatives that comprise the sample for that component, that is:
(0.40 x 126.83) + (0.42 x 150.21) + (0.10 x 98.36) + (0.08 x 130.20).
13.14. If any prices are missing in a compiling period a price is imputed using the price movements of similar specifications for which prices have been reported. Alternatively, the missing price is imputed using other data sources (for example, exchange rate movements may be used in the foreign trade price indexes).
13.15. Similar procedures to those described in paragraphs 13.7 and 13.8 are used whenever sample weights (i.e. weighting of specifications to a component) are changed, to ensure that the change in weights does not affect the movement in the index. This is illustrated in the following example of an across the board price increase of 10 per cent between periods 1 and 2, and further price increases in period 3:
The index number for period 1, derived using the base period weights, would be 131.40. If the period 2 weights were to be applied directly to the period 2 price relatives the index number would be 147.95, which implies a price increase of 12.6 per cent not the 10 per cent that actually occurred. This is because part of the implied increase is due to the change in weighting pattern and because the reference period for the weights (period 2) and the relatives (base period) are no longer consistent.
13.16. There are two methods for overcoming this problem. In the first, period 2 is established as the new base period and the resulting index numbers are converted to the original reference base using a conversion factor:
13.17. The second method involves revaluing the new weights to reflect the prices of the base period. That is:
13.18. While both methods yield the same result, the second method has the advantage that it maintains continuous price series for each specification and ensures that all price relatives remain on the same base. This enables meaningful comparisons over time and across specifications, thus facilitating the editing of index calculations. As a consequence, this second method is generally followed in calculating producer price indexes.
Calculating published index series
13.19. The various published index series are derived from the fine level component series using the combining weights that are published at the time of the latest index rebase and reweight. Again, the weights used are value weights.
13.22. A number of other measures are also calculated for each price index series, viz percentage changes, index points contributions and index points changes.