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21 In concept the valuation basis of the SOP indexes is basic prices (see paragraphs 4-8). However, the use of component series from existing ABS price collections in some cases results in the pricing basis diverging from this ideal. For example, imports are priced on a 'free-on-board' (f.o.b) basis, not 'cost, insurance, freight' (c.i.f), which approximates basic prices.
The SOP concept
22 The indexes are compiled using the SOP concept. Under this concept flows of commodities are categorised according to their economic destination on a sequential basis along the production chain. The basis for the categorisation is the Australian input-output tables (1996-97). The primary categorisation is between final commodities (i.e. commodities destined for final consumption, capital formation or export) and non-final commodities (i.e. commodities that flow into intermediate consumption for further processing).
23 This initial breakdown of the commodity flows into final and non-final represents a useful economic dissection of producers' transactions. However, the non-final commodities can flow into the production of both final and other non-final commodities. Therefore, to aid analysis, the non-final commodity flows have been divided on a sequential basis between Stage 1 (or preliminary) commodities and Stage 2 (or intermediate) commodities as illustrated below. This approach results in three separate stages of production.
24 The three stages are not aggregated in order to avoid the potential distorting effects that may result from multiple counting of changes in transaction prices as commodities flow through different production processes.
25 Under this framework, preliminary (Stage 1) commodities are used in the production of intermediate (Stage 2) commodities; in turn intermediate (Stage 2) commodities flow into the production of final (Stage 3) commodities.
26 The framework allows for analyses of price change as commodities flow through production processes. Price changes for earlier stages of production may be indicators of possible future price changes for later stages.
Transaction flow approach
27 The ABS has adopted a transaction flow approach in disaggregating commodity supply into the various production stages. This approach means that the assignment of a commodity to a stage is based on the proximity of its use in final demand.
28 Alternative degree of fabrication or principal destination approaches are employed by statistical agencies in some other countries. These approaches result in the allocation of particular commodities to one, and only one, stage. This would present particular problems for Australia due to the openness of the economy, with exports (and imports) equivalent to about 20% of gross domestic product. Commodities such as wheat, wool, and iron ore are exported in large volumes as well as being further processed locally. The allocation of such commodities to a single stage would be very arbitrary by necessity.
29 Adopting the transaction flow approach means, for example, that exported wheat and domestically used wheat are treated as different commodities for index construction purposes. Under this approach commodities transactions can be allocated to more than one stage. Exported wheat is treated as a final (Stage 3) commodity while wheat used domestically to make the flour used in bread production is considered to be a preliminary (Stage 1) commodity. Similarly, commodities such as energy and containers appear under all three categories.
Scope and coverage
30 Producer price indexes conventionally relate to the output of domestic industries, at basic prices, either inclusive or exclusive of exports. As the main focus is on domestic inflation, exports are excluded from the headline SOP series 'Final (Stage 3) commodities', as presented in the key figures on the front page and in tables 1-6. Index series for Final (Stage 3) commodities including exports are available in tables 24 and 25 on the ABS website <www.abs.gov.au>.
31 Imports have also been incorporated within the framework, recognising that they represent an important potential source of inflationary pressure.
32 In concept, the SOP indexes incorporate all flows of goods and services. However, currently there is limited coverage of service industries and the construction industry by the producer price indexes (see sections on construction industry and service industries producer price indexes below).
33 Price indexes for most transport and storage services (division I of ANZSIC) and property and business services (division L of ANZSIC) industries have been included in the SOP framework. However, price series for most Final (Stage 3) consumer services are not currently available on a sufficiently timely basis to allow their inclusion in the indexes. This has the effect of decreasing the relative weight of consumer items versus capital items in the final stage. It is intended to introduce additional services price series as they become available, along with the consequential weight changes.
34 Index coverage for the construction industry (division E of ANZSIC) is currently limited to the output of the following ANZSIC classes:
35 As with services, it is intended to introduce further construction price series as they become available.
Items and weights
36 The items included in the indexes reflect the values of commodity flows, for both domestic supply and imports, allocated to stages based on an analysis of detailed 1996-97 input-output tables. The index structures and weighting patterns for the SOP indexes are shown in the Appendix of the December 2002 issue of Producer Price Indexes, Australia (cat. no. 6427.0).
Comparisons with the Consumer Price Index
37 Final (Stage 3) indexes are presented for consumer commodities. It should be noted that this index is not directly comparable with the Consumer Price Index (CPI). The two indexes differ significantly in concept and coverage. The major differences are:
MANUFACTURING INDUSTRY PRODUCER PRICE INDEXES
38 The manufacturing industry producer price indexes relate to the outputs (i.e. articles produced) and inputs (i.e. materials used) of establishments classified to designated sectors of the Australian manufacturing industry. They are important sources of data for the SOP indexes.
39 Tables 10 and 11 present the Price Indexes of Articles Produced by Manufacturing Industries and tables 12-14 present the Price Indexes of Materials Used in Manufacturing Industries. Basic prices are used for the output index and purchasers' prices for the input index (see paragraphs 4-8). Therefore, as far as possible, ex-factory prices are included in the output index and delivered into factory prices in the input index.
40 Table 35, which is available on the ABS website, presents Price Indexes of Copper Materials used in the manufacture of electrical equipment.
41 All of the manufacturing indexes are calculated on the reference base 1989-90=100.0.
42 The manufacturing indexes are constructed on a net sector basis with intra-sector transactions netted out. The scope of the output index is therefore restricted to transactions in articles produced by the defined sector of Australian manufacturing industry that are sold or transferred to domestic establishments outside that sector, or used as capital equipment, or exported. The scope of the input index relates to transactions in materials used in the defined sector of Australian manufacturing industry that are produced by domestic establishments outside that sector or imported.
43 The manufacturing division output index (table 10) measures changes in prices of articles produced by establishments classified to ANZSIC division C, Manufacturing, that are sold or transferred to domestic establishments outside the manufacturing division for intermediate use, or used as capital equipment, or exported. It excludes intermediate transactions in articles produced by establishments within the manufacturing division and sold or transferred to other establishments within the manufacturing division for further processing.
44 Similarly, the manufacturing division input index (tables 12 and 13) measures changes in prices of materials used by establishments classified to ANZSIC division C, Manufacturing, that have been purchased or transferred in from domestic establishments outside the manufacturing division or imported. It excludes intermediate transactions in materials produced by establishments within the manufacturing division and sold or transferred to other establishments within the manufacturing division for further processing.
45 An advantage of the net sector approach over the alternative gross sector approach (under which the intra-sector transactions would be in-scope) is that it avoids the potential distorting effects that may result from multiple counting of changes in transaction prices as commodities flow through different production processes.
46 On the other hand, although conceptually valid, the exclusion of the internal intermediate transactions from the net sector manufacturing division indexes results in incomplete coverage of the targeted sector of the economy. In order to increase coverage, while still avoiding the multiple counting issue, independent net sector measures have been constructed for ANZSIC manufacturing subdivisions and groups. While having intermediate transactions between different manufacturers within a given subdivision or group netted out, intermediate transactions with manufacturers in other subdivisions/groups are in-scope.
47 The output indexes for ANZSIC subdivisions and groups (table 11) measure changes in prices of articles produced by establishments classified to each defined ANZSIC manufacturing sector which are sold or transferred to establishments outside that sector. These exclude intermediate transactions in articles produced by establishments within the specific sector and sold or transferred to other establishments in the same sector for further processing.
48 Similarly, the input indexes for ANZSIC subdivisions and groups (table 14) measure changes in prices of materials used by establishments classified to each defined ANZSIC manufacturing sector which are purchased or transferred in from establishments outside that sector. These exclude intermediate transactions in materials produced by establishments within the specific sector and sold or transferred to other establishments in the same sector for further processing.
49 It is important to note that the manufacturing division output and input indexes, and the corresponding subdivision/group indexes, are independent constructs. As such, a division index cannot be derived by simply weighting together the separate subdivision and group indexes as the latter net sector indexes are not a straightforward decomposition of the broader net sector index.
Items and weights
50 The items included in the manufacturing indexes reflect the values of articles produced and materials used based on an analysis of detailed input-output tables; 1993-94 for the output indexes and 1989-90 for the input indexes.
51 The index structures and weighting patterns are shown in Appendix A of the September quarter 2000 issue of the former publication Price Indexes of Articles Produced by Manufacturing Industry, Australia (cat. no. 6412.0), and Appendix A of the July 1996 issue of the former publication Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0).
CONSTRUCTION INDUSTRY PRODUCER PRICE INDEXES
52 The construction industry producer price indexes relate to the principal outputs (e.g. buildings) and the inputs (i.e. materials used) of establishments classified to designated sectors of the Australian construction industry. They are important sources of data for the SOP index.
53 Table 15 presents the Price Index of the Output of the General Construction Industry, and Table 16 presents price indexes of the outputs of the constituent industries of this ANZSIC subdivision. Tables 17 and 18 present the Price Index of Materials Used in House Building. The pricing basis is basic prices for the output indexes and purchasers' prices for the input indexes (see paragraphs 4-8 above). Therefore, as far as possible, builders' selling prices are reflected in the output index and delivered on site prices in the input indexes.
54 The output indexes are calculated on the reference base 1998-99=100.0 and the input indexes on the reference base 1989-90=100.0.
55 The Price Index of the Output of the General Construction Industry (table 15) measures changes in prices of the principal output of ANZSIC subdivision 41 - general construction. The price indexes in table 16 measure changes in the price of the principal output of constituent groups and classes of this subdivision. These groups and classes are: the building construction group (411), which consists of the classes house construction (4111), residential building construction n.e.c. (4112) and non-residential building construction (4113); and the non-building construction group (412), with the class of road and bridge construction (4121). Road and bridge construction is the sole contributor to the index for non-building construction until coverage can be extended to include the class of non-building construction n.e.c. (4122), which consists of railways, telecommunications, electricity infrastructure, etc.
56 The first input index measures changes in prices of materials used in house building, where a house is defined as a detached building predominantly used for long-term residential purposes and consisting of only one dwelling unit. ANZSIC class 4111 (house construction) approximates the industry scope of the index.
57 The second input index measures changes in prices of materials used in other forms of building with a scope approximating ANZSIC class 4112 (residential building construction n.e.c.) and class 4113 (non-residential building construction), together.
58 Neither of the input indexes explicitly cover alterations, additions, renovations and repairs. They each relate to the statistical division for each State capital city.
Items and weights
59 ANZSIC class output indexes at the national level are aggregated to the relevant group and subdivision using weights derived primarily from values of the supply of new general construction products in Australia as measured in Input-Output statistics. ANZSIC class indexes at the State and Territory level are aggregated to the national level using proportions based on the value of work done by State and Territory and type of construction as measured by ABS building and construction activity statistics. From December quarter 2007 index numbers have been calculated using an updated weighting pattern in which Input-Output values for 2001-02 have replaced 1996-97 values and new State and Territory activity proportions have been derived from the two calendar years 2005 and 2006 to replace previous proportions derived from a 5 year average of the years 1994-95 to 1998-99. The indexes generally use prices for work undertaken in each capital city, as construction activity in the city is taken to represent the whole State or Territory. For Queensland, however, residential building construction n.e.c. (4112) and non-residential building construction (4113) also use prices obtained for North Queensland.
60 The items and weights for the price index of materials used in house building were derived from reported quantities of each material used in selected representative houses in the three years ending 2002-03. The weighting pattern for each capital city index will reflect variations in prices for the cities as applied to an Australian average basket of house building materials, with some allowance for city specific building practices e.g. the differential use of steel and timber materials in Perth and Adelaide compared with the other capital cities. The weighting patterns for the price index of material used in house building are set out in Appendix 2 of the September quarter 2005 issue of Producer Price Indexes, Australia (cat. no. 6427.0). Note that the weights shown are values based on the quantities of various materials used in house building over the 3 years ended 2002-03, valued at September quarter 2005 prices.
MINING INDUSTRY PRODUCER PRICE INDEXES
61 Table 19 presents Price Indexes of Materials Used in Coal Mining. The pricing basis of the index is purchasers' prices (see paragraphs 4-8) and, as far as possible, the prices included in the index are for items delivered to the mine site or to the primary storage area for a group of mines.
62 The items included in the indexes reflect the value of materials used in the operation of open cut and underground coal mines in Australia during 1999-2000. The index structures and weighting patterns are available on request.
63 The indexes are calculated on the reference base 1989-90=100.0.
SERVICE INDUSTRIES PRODUCER PRICE INDEXES
64 Tables 20-23 present producer price indexes for the output of the transport (freight) and storage division, and the property and business services division of the ANZSIC. Included are index numbers for each of the divisions and subdivisions. Transport indexes presented cover freight and services to transport activities only, i.e. passenger transport is excluded. The pricing basis of the indexes is basic prices (see paragraphs 4-8), and so the prices used in the index relate to the amount received by the service provider. The indexes are important sources of data for the SOP indexes. The index numbers are calculated on the reference base 1998-99=100.0.
65 These indexes represent the results to date of a program to progressively extend the scope of the producer price indexes into the service sectors of the economy. First results from the program were published in March 1999, by way of experimental indexes, in the ABS Information Paper: Producer Price Index Developments (cat. no. 6422.0).
66 The transport (freight) and storage division, and property and business services division indexes measure changes in prices of services provided by establishments classified respectively to ANZSIC division I, transport (freight) and storage and ANZSIC division L, property and business services. Index numbers for these divisions are provided in tables 20 and 22 respectively.
67 Tables 21 and 23 contain index numbers for the subdivisions of ANZSIC division I, transport (freight) and storage, and the subdivisions and groups of ANZSIC division L, property and business services, respectively . Indexes at the ANZSIC group and class level for division I, and the ANZSIC class level for division L, are also available on the ABS website <http://www.abs.gov.au> under catalogue 6427.0, in tables 33 and 34 respectively. Note that some ANZSIC classes within these divisions do not yet have established indexes, and thus are not represented within these tables.
Items and weights
68 ANZSIC class indexes are aggregated to the relevant group, subdivision and division using weights derived from 1996-97 input-output domestic production values, in combination with data from other ABS surveys and industry sources. Where ANZSIC class indexes have not yet been developed, their weight is spread proportionately across the relevant group, subdivision or group of subdivisions dependent on an assessment of what is most appropriate given the activities of the particular class.
69 The development of these new price collections has involved a wide range of diverse industries with different measurement problems. Accordingly, extensive consultation with industry associations and individual businesses has been undertaken to determine the most viable approach, on a case-by-case basis.
70 Characteristics found within the services sector of the economy have complicated the task of price measurement.
71 The tendency within many industries to provide unique, one-off services tailored to the needs of individual customers has posed difficulties in establishing continuity of pricing to constant quality.
72 The 'bundling' of a range of different component services within the one transaction or contract has required investigation of the feasibility of 'unbundling', that is, obtaining separate prices for each of the components of the total service. Where this has not proven to be feasible, the whole service bundle has been priced in total.
73 Respondent businesses are asked to report details of any discounts they offer so that actual transactions prices can be calculated. However, as discounts are sometimes negotiated between individual buyers and sellers in relation to particular transactions, identifying discounts has not always been straightforward.
74 The deregulation of some service industries leads to structural changes and more complex pricing practices. To deal with this, samples are continually updated to incorporate new businesses and pricing methodologies are reviewed over time.
75 It is planned to make available indexes for the majority of remaining ANZSIC classes within the transport (freight) and storage division, and property and business services division after they have been developed from experimental to production status. At such time these new indexes would contribute to the broader group, subdivision and division indexes presented in this publication. Those ANZSIC classes for which development of a price index is not considered feasible will continue to have their weight distributed for aggregation purposes as described in paragraph 68. Work has also commenced on developing indexes for other divisions of the ANZSIC.
76 Index numbers for financial years are simple averages of the relevant quarterly index numbers.
77 Indexes for the Price Index of Materials Used in House Building are presented separately for each of the six State capital cities. These city indexes measure price movements over time for each city. They do not measure differences in price levels between cities.
ANALYSIS OF INDEX CHANGES
78 Care should be exercised when interpreting quarter-to-quarter movements in the indexes as short-term movements do not necessarily indicate changes in trend.
79 Movements in indexes from one period to another can be expressed either as changes in 'index points' or as percentage changes. The following example illustrates the method of calculating index points changes and percentage changes between any two periods:
80 Stage of Production: Total Final commodities index numbers
less June quarter 2007 125.2 (see table 1)
Change in index points 5.9
Percentage change 5.9/125.2 X 100 = 4.7% (see table 2)
81 Tables 5, 6 and 7 provide analyses of the index points contribution which ANZSIC groups make to the stage of production final commodities indexes, in total, and then separately for domestic and imported commodities. For example, in table 5 petroleum refining contributed 4.73 index points to the Total Final commodities index number of 131.1 for June quarter 2008 and 0.36 index points to the net change of 1.3 index points between March quarter 2008 and June quarter 2008.
82 Tables 8 and 9 analyse the contributions to the intermediate and preliminary commodities index numbers, respectively.
83 Similar contribution tables are available on request for most of the industry sector indexes.
84 Further information on recent price index developments in the ABS is presented in the following publications:
An Analytical Framework for Price Indexes in Australia, cat. no. 6421.0
Producer Price Index Developments, cat. no. 6422.0
Review of the Import Price Index and Export Price Index, Australia, cat. no. 6424.0
Price Indexes and The New Tax System, cat. no. 6425.0
Information Paper: The Introduction of Hedonic Price Indexes for Personal Computers, 2005, cat. no. 6458.0
Information Paper: Changes to the Weights of the Price Indexes for the Output of the General Construction Industry, Australia, 2008, cat. no. 6406.0
85 Users may also wish to refer to the following related publications:
Consumer Price Index, Australia, cat. no. 6401.0
Labour Price Index, Australia, cat. no. 6345.0
Australian National Accounts, Input-Output Tables, cat. no. 5209.0
Balance of Payments and International Investment Position, Australia, cat.no.5302.0
86 Current publications and other products released by the ABS are listed in the Catalogue of Publications and Products (cat. no. 1101.0). The Catalogue is available from any ABS office or the ABS website <http://www.abs.gov.au>. The ABS also issues a daily Release Advice on the website which details products to be released in the week ahead.
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