Scope and coverage
3.1 Producer price indexes conventionally relate to the output of domestic industries, at basic prices, either inclusive or exclusive of exports. In order to provide for more complete analyses, exports, as well as domestic usage, of Australia’s output have been included within the scope of the SOP index model.
3.2 Imports have also been incorporated within the framework, recognising that they represent a very important potential source of inflationary pressures. The model therefore allows for the monitoring of the effects of price changes of both domestically produced and imported commodities.
3.3 Conceptually, the scope of the indexes is economy-wide relating to the output of all the goods and services industries. However, for reasons of data availability, the initial coverage is restricted to goods producing industries, excluding the construction industry. The conceptual model provides for the future extension of coverage to service industries and the construction industry as data become available.
3.4 The SOP index model consists of the major aggregates shown in diagram 1.
3.5 For some analyses, the focus would be on the domestic economy, with exports treated as a leakage. For such purposes, the relevant Final (Stage 3) goods index would be exclusive of the Exports component of Domestic goods (that is, the Domestic Consumption plus Capital goods aggregate).
1: STAGE OF PRODUCTION INDEX MODEL
3.6 A major long term development program will be required to achieve significant coverage of the services and construction industries. In the meantime, restructuring the currently available producer and international trade price index component data within the framework of an integrated SOP index model has a number of advantages:
- It represents a significant step towards providing one of the important index models of the proposed family or system of price indexes described in Information Paper: An Analytical Framework for Price Indexes in Australia (Cat. no. 6421.0). The planned Domestic Final Purchases (DFP) Index (described in detail in that paper) will be confined to final transactions and will not cover intermediate, or non-final, transactions. As such, the DFP index cannot provide a complete picture of current price experience in the economy. The SOP initiative generates a complementary view of inflation which embraces intermediate, as well as final, transactions.
- It provides a valuable addition to the current suite of partial producer price indexes through the provision of a summary, economy-wide producer price index measure relating to final transactions, i.e. the index aggregate represented by ‘Final (Stage 3) goods—Domestic’ in diagram 1. For the first time in Australia, a broadly-based headline producer price index would be available to summarise the price experience at producer output level, i.e. at basic prices.
Transaction flow approach
- It enables gaps in the available prices data to be identified within an integrated statistical framework.
3.7 The ABS has adopted a transaction flow approach in disaggregating output 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.
3.8 Alternative degree of fabrication or principal destination approaches are employed by statistical agencies in some other countries (which, incidentally, tend to use the term Stage of Processing rather than Stage of Production as proposed for Australia).
3.9 The degree of fabrication and principal destination approaches result in the allocation of particular commodities to one, and only one, stage. This would present particular problems for Australia because of our very open economy in which exports (and imports) measure 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, by necessity, be very arbitrary.
3.10 While exports of agricultural and mining commodities constitute final demand from the perspective of the domestic economy, they are in fact intermediate inputs into other countries’ production. Adopting the transactions flow approach means, for example, that exported wheat and domestically used wheat are effectively treated as different commodities for index construction purposes. Certainly their prices relate to different classes of transactions with different price experiences in different markets.
3.11 Under this more flexible transaction flow approach, it is the transactions in a given commodity that are allocated to the relevant market within the production chain. Commodity transactions can therefore be allocated to more than one stage, as illustrated by the examples below.
3.12 In the first example above, Bauxite as a Preliminary (Stage 1) good is an input into the production of Alumina. In turn Alumina is an Intermediate (Stage 2) good which is then used to produce Aluminium, a Final good (destined for final consumption, capital formation or the export market).
3.13 The next example shows Bauxite, as an Intermediate (Stage 2) good, used to produce Alumina which is subsequently exported as a Final (Stage 3) good.
3.14 Under the third example, Bauxite that is sold direct to the export market without further processing in Australia is a Final (Stage 3) good.
3.15 The other examples above show similar categorisations for different sugar and meat products.