Review of the Tradable and Non-tradable Items of the CPI
A concern of policy makers and analysts is the extent to which price change is attributable to domestic market factors or international factors. Price change arising from domestic factors, such as changes in labour costs, productivity or profits calls for a different policy response and assessment of market conditions than changes arising from exchange rate movements or changes in demand and supply in overseas markets.
In September 1999, the Australian Bureau of Statistics released the tradables and non-tradables price indices, based on the methodology by Knight and Johnson (1997). The tradables component comprises all items whose prices are largely determined on the world market. An item is said to be tradable if imports represent at least ten per cent of total supply of the item; or exports represent at least ten per cent of the total supply of the item. The threshold of 10 percent was chosen on the basis of theoretical considerations, prior expectations and sensitivity analysis. The ABS uses the 10 per cent threshold to classify each CPI expenditure class as either tradable or non-tradable. Total supply of an item is defined as domestic production plus imports. Data on imports, exports and total supply are sourced from input-output tables. For each input-output commodity, the ratio of imports to supply and the ratio of exports to supply was calculated. In converting from input-output commodities (at the eight digit level) to CPI expenditure classes, these ratios were weighted together using household final consumption expenditures as weights.
Following discussions held in April 2010, members of the 16th series CPI Advisory Group requested that the tradable and non-tradable series be reviewed. The Analytical Services Branch (ASB), in support of Prices Research and Development, was tasked with the review of the methodology used to ensure that it remains relevant in the current economic climate.
The review consists of two phases: the first phase consists of a review of the current 10 per cent threshold. The second phase is to update the tradables and non-tradables goods classification using the latest Input-Output tables.
For further information on the analysis, contact Shaun McNaughton on (02) 6252 5125 or email@example.com.