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SPOTLIGHT ON NATIONAL ACCOUNTS, AUSTRALIA
Since September 1998 CVMs have been used in Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0). Prior to this constant price estimates were used. For a detailed explanation of CVMs see Information Paper: Australian National Accounts, Introduction of Chain Volume and Price Indexes (cat. no, 5248.0).
Chain volume estimates in the National Accounts provide time series of expenditure and production aggregates that are free of the direct effects of price change. All the current price aggregates of expenditure and production appearing in the national accounts are estimates of the sums of the values of individual transactions. Each of these transactions has two components: a price and a quantity. From one period to another the quantities and prices comprising the transactions change. This means that when the current price value of an aggregate, such as GDP, in one period is compared with the current price value in another period, the difference between them usually reflects both changes in quantity and changes in price of the constituent transactions. In order to estimate by how much the 'volume' of GDP has changed between the two periods we need to measure the value of GDP in each period using the same unit prices.
Chain volume estimates are derived by weighting together period–to–period indexes of volume estimates of components at the elemental level, that is, the lowest level at which volume estimates are derived. Despite their name, the elemental volume estimates are measured in dollars and are in fact usually a bundle of goods and services of a similar type. Most are derived as constant price estimates, but some are chain volume estimates derived indirectly. Two basic approaches can be taken to deriving volume estimates at the elemental level.
The first approach uses quantity data to derive constant price estimates. For an individual commodity, the estimate of quantity in each period is multiplied by the price (or average unit value) in some base year. This method, referred to as quantity revaluation, can be applied if the commodity is defined narrowly enough to ensure that it is homogeneous in content and free from quality change over time (since a change in quality is defined as a change in quantum).
The second approach to obtaining volume estimates is referred to as price deflation. A measure of the price component of the current price value is obtained (usually in the form of a price index) and is divided into the current price value in order to revalue it in the prices of the previous year. While the term price deflation suggests that the current price value is being reduced this is not the case when the price index (sometimes called the deflator) in the current period is less than it is in the reference period. In most cases, the price index used is fixed–weighted (that is, the weights used to combine the constituent price indexes are not changed frequently). In cases where both the price and quantity relativities of the constituents of an elemental component are changing quickly it is important to construct annually reweighted chain price indexes. In those cases where price and quantity relativities are not changing rapidly, reweighting is undertaken less frequently, but usually no less than once every six years.
In compiling its price indexes, the ABS makes a good deal of effort to ensure that as far as practicable they reflect 'pure' price change. When a change in specification of a good or service occurs the ABS does its best to isolate and exclude any change in price attributable to the change in specification. To the extent that this is achieved, the resulting volume estimates reflect improvements (or degradations) in products. For details of how the ABS deals with specification changes in compiling its price indexes refer to The Australian Consumer Price Index: Concepts, Sources and Methods (cat. no. 6461.0), Producer and International Trade Price Indexes: Concepts, Sources and Methods (cat. no. 6419.0) and Labour Price Index: Concepts, Sources and Methods (cat. no. 6351.0.55.001).
Export Price Index (EPI)
The ABS publishes on a quarterly basis the EPI (along with the Import Price Index). Both the EPI and the IPI have displayed different price movements from their counterpart national accounts chain price indexes over time. The major reasons for these differences are as follows:
EXPORT CVM METHODOLOGY
In the various National Accounts publications Exports of goods and services are shown as a single aggregate (the exception is the detailed input–output tables where they are broken down by industry of origin or product group) In the Balance of Payments they are broken down into a number of components. The main data source for exports is the ABS’s international trade statistics, which are derived from information reported by exporters or their agents to the Australian Customs Service. As this does not cover all goods and services exported there are a number of other data sources included, such as ABS’s Survey of International Trade in Services.
To obtain volume estimates for Exports, current price values (CPVs) need to be either deflated by an appropriate price deflator or estimated via quantity revaluation. Currently approximately 70% of the value of all trade data is quantity revalued with the remaining 30% being deflated by EPIs.
Quantity revaluation involves calculating an IPD that is used to deflate higher aggregates to form CVMs. The first step in calculating a quantity revalued IPD is to estimate the Average Unit Value (AUV). The AUV is the CPV of a commodity divided by its quantity in the base period (equation 1). The second step is to estimate the constant price (KPV), which is the quantity (Q) in the current period multiplied by the AUV from the base year (equation 2). The KPV is the value of a commodity expressed in the prices of a previous period. The final step produces the IPD, which is simply dividing the CPV by the KPV to produce the IPD (equation 3).
The Export data is quantity revalued at the 8–digit Australian Harmonised Export Commodity Classification (AHECC) level, as this is the lowest level at which quantity details are available. The AHECC base year estimates are then aggregated to the corresponding 2–digit SITC yielding both the CPV and the KPV and hence an IPD for the SITC division. In order to utilise the most appropriate weighting structure each KPV is calculated based on its previous year’s AUV. These CPVs and KPVs are then used in the chaining process to estimate CVMs both at the SITC division level and for higher aggregates. A specific example of how iron ore exports impact on the Metalliferous ores (SITC division) IPD is set out below.
Quantity revaluation utilises the most current and detailed data available. However, it is only appropriate to use for homogeneous commodities. An underlying assumption for quantity revaluation to be effective is that prices of commodities within a classification move in a similar fashion.
To determine the appropriateness of quantity revaluation for any given commodity, data is analysed at the 8–digit AHECC level. Data is analysed to determine if price changes are a part of normal market fluctuations or displaying a lack of homogeneity.
Until recently Exports of Goods were quantity revalued using a single base year for prices of 1989–90. By having the prices fixed at 1989–90 levels, over time as the commodities making up the 2–digit SITC changed, the weighting structures of these SITC divisions were potentially distorted. The introduction of annual base years in September 2010 enabled the IPDs to reflect up to date weights.
IRON ORE EXPORTS
Iron ore has been used to provide an understanding of the impact of changing to annual base years from one based on 1989–90 prices. Iron ore is one of the commodities in the SITC Division 28 Metalliferous ores. For example, in the December Quarter 2009, iron ore made up a large proportion of the total KPV based on 1989–90 prices. By using 2007–08 as a base year for prices, iron ore comprised an additional 18% of the KPV for Division 28, due to changes in the average annual unit price for iron ore between 1989–90 and 2007–08.
The following graph compares growth rates for the Metalliferous ores' IPD between 1989–90 and 2005–06 base years, over the period September 2006 to June 2007.
Figure 1: Metalliferous ores IPD
From the September Quarter 2010 release of Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) this new methodology for estimating CVMs for exports has been incorporated. Annual base years have been implemented back to September Quarter 1994, the start of annual Supply and Use tables. Prior to this the 1989–90 base year has been used. By updating the base year from 1989–1990 to annual base years, a more appropriate weighting structure is assigned to the data. This in turn has led to more accurate volume estimates for exports.
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