6421.0 - Information Paper: An Analytical Framework for Price Indexes in Australia, 1997  
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Contents >> Chapter 2: Stocktake of Australian price measures

Introduction

2.1. This chapter provides an outline of each of the main price measures available or under consideration, either as direct price indexes or derived from the national accounts. Their interrelationships are then illustrated by reference to the Input Output framework. The objective is to help to improve users’ knowledge and understanding of the array of Australian price statistics and thus help facilitate the selection of the most appropriate measure(s) for particular applications, whether it be analysis of inflation, indexation, business contract adjustment or other purposes. Further, as explained in chapter 7, it is proposed to draw on the illustration within the Input Output framework in reviewing the way price statistics are presented and published. Some readers may choose to skip the rest of this chapter and continue reading at the beginning of chapter 3 where the exposition of the new developments commences.


Outline of measures

2.2. The key characteristics of each of the main price measures are described below. They are categorised as:

      • direct price indexes: Consumer, Producer and International Trade Price Indexes and Labour Cost Index;
      • national accounts Implicit Price Deflators (IPDs); and
      • national accounts Fixed-Weighted Price Indexes (FWIs).

2.3. For each measure, the valuation basis is described as either purchasers’ prices or basic prices, where:
      • the purchasers’ price is the amount paid by the purchaser inclusive of indirect taxes (less subsidies), trade margins (wholesale and retail) and transport costs. That is, the price for commodities supplied to the purchaser; and
      • the basic price is the amount received by the producer exclusive of indirect taxes (less subsidies), and transport and trade margins. That is, it is the ex-plant price.

2.4. Conceptually, the basic price equates to the purchasers’ price minus indirect taxes (less subsidies) and trade and transport margins. However, it is important to note that price indexes at basic prices are output (i.e. ex-plant) measures and relate to a different pricing point, and hence different transactions, to indexes at purchasers’ prices. Indexes at purchasers’ prices are input measures (i.e. on a delivered to user basis) and thus the transaction prices are inclusive of indirect taxes (less subsidies) and margins associated with the application of any transport, wholesale and retail trade services.

Direct price indexes

2.5. The Consumer Price Index (CPI) (6401.0) relates to goods and services bought by resident household consumers. The population group for the CPI is employee households in metropolitan areas. Indexes are produced for each of the eight capital cities, for eight broad groups of goods and services and for 107 expenditure classes. The index is produced quarterly and has fixed weights which are updated about every five years. The ABS has recently commenced work on reviewing and reweighting the CPI. An information paper, seeking user input to the review, will be published in April 1997.

2.6. As the CPI is an input index, that is it relates to the prices of goods and services bought by householders, the valuation basis is purchasers’ prices and the prices are obtained by direct collection from retail outlets and other businesses, authorities, etc. from which the CPI population group buys.

2.7. The House Price Indexes (HPI) (6416.0) relate to the selling prices of established houses and project homes (separately) for each of the eight capital cities. The indexes are produced quarterly and have fixed weights which are updated approximately every five years. The valuation basis of the HPI is purchasers’ prices.

2.8. The Price Indexes of Materials Used in Manufacturing Industries (MUMI) (6411.0) relate to materials used in Australian manufacturing industries. Indexes are compiled on a net sector basis for the Manufacturing Division of the Australian and New Zealand Standard Industrial Classification (ANZSIC) as a whole and separately for ANZSIC Subdivisions and/or Groups within Manufacturing. They are compiled on a net sector basis as the scope of the indexes relates to those materials which are used by establishments within the defined manufacturing sector and which have been produced by establishments outside that sector. That is, the relative weights reflect the values of materials acquired from outside the sector rather than the value of all materials used.

2.9. The indexes are produced monthly and have fixed weights which are updated approximately every five years. As MUMI is an input index, the valuation basis is purchasers’ prices and the prices are obtained by direct collection, mainly from manufacturers and importers.

2.10. The Price Indexes of Articles Produced by Manufacturing Industry (APMI) (6412.0) relate to articles produced by Australian manufacturing industries. Indexes are compiled on a net sector basis for the Manufacturing Division of the Australian Standard Industrial Classification (ASIC) as a whole and separately for Subdivisions and/or Groups within Manufacturing. In each case, the scope of the indexes relates to articles produced by establishments within the defined manufacturing sector and which are used by establishments outside that sector.

2.11. The indexes are produced monthly and have fixed weights which are updated approximately every five years. Being an output index, the valuation basis is basic prices and the prices are obtained by direct collection, mainly from manufacturers.

2.12. The Price Index of Materials Used in House Building (HB) (6408.0) and Price Index of Materials Used in Building Other than House Building (OTHB) (6407.0) relate respectively to materials used in the construction of houses and other forms of building. Indexes are presented for selected materials and for each of the six State capital cities separately. For the OTHB index, series on an ANZSIC Group industry of origin basis (average of six State capitals) is also provided.

2.13. The indexes are produced monthly and have fixed weights which are updated approximately every five years. As the HB and OTHB are input indexes, the valuation basis is purchasers’ prices and the prices are obtained by direct collection from suppliers of building materials.

2.14. The producer price index (PPI) service industry indexes which are currently under development relate to the selling prices of the output of particular service industries. The primary classification employed will be ANZSIC. Initial industries being targeted are transport services, property services and a selection of business services. The valuation basis of the indexes will be basic prices, though the differences between basic prices and purchasers’ prices for services will generally be significantly less than for goods. Prices will be obtained mainly by direct collection from suppliers of services.

2.15. The Export Price Index (EPI) (6405.0) and Import Price Index (IPI) (6414.0) relate respectively to exports of merchandise from Australia and imports of merchandise landed in Australia. The EPI is presented under the Australian Harmonised Export Commodity Classification (AHECC), Standard International Trade Classification (SITC), and ANZSIC while the IPI is presented under the SITC, Combined Australian Customs Tariff and Statistical Nomenclature and ANZSIC classifications.

2.16. The indexes are produced monthly and have fixed weights which are updated approximately every five years. The valuation basis is f.o.b. at the main Australian ports of export for the EPI (approximating purchasers’ prices) and f.o.b. country of origin for the IPI (which is at a valuation point prior to basic prices: conceptually, the c.i.f. price for imports is considered to be the basic price).

2.17. The Stage of Production producer price indexes (SOP) which are currently under development relate to the selling prices of the output of Australian industries. Conceptually the indexes will be economy-wide and relate to the output of all the goods and services industries, though in practice the initial scope will be restricted to goods producing industries.

2.18. The commodity flows will be 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. The primary index classification will be into final goods (i.e. goods destined for final consumption, capital formation or export as categorised under GDP(E), the expenditure approach to measuring gross domestic product), and intermediate goods (i.e. goods that flow into intermediate consumption for further processing). To aid analysis, the intermediate goods will be further split on a sequential basis between first stage and second stage intermediate goods, thus providing three stages of production. Note that indexes for each of the three stages are not aggregated, thus avoiding the issue of multiple counting of transactions.

2.19. Under this model, ‘first stage intermediate goods’ are used in the production of ‘second stage intermediate goods’; in turn, ‘second stage intermediate goods’ flow into the production of ‘final goods’. For each of the three stages, separate indexes will be presented for domestic production and imports. The ‘final goods’ will be further split into capital goods, consumer goods and exports.

2.20. The valuation basis of the SOP will be basic prices. The indexes will be predominantly based on a reclassification of prices collected under the existing producer and international trade price index collections from producers, importers and exporters. Since most of this information is currently collected monthly, the index could be compiled on a monthly basis.

2.21. Experimental Tradables Price Indexes (1351.0, issues 96/1, 97/1 (forthcoming)) relate to the prices received by domestic producers of tradable and non-tradable output. Indexes have been compiled for the importable, exportable, tradable and non-tradable sectors, and at both the 28 and 109 industry level of the Input Output Industry Classification. The weights are derived from the Input Output tables. The detailed industry price data are sourced from a range of existing ABS and Australian Bureau of Agricultural and Resource Economics (ABARE) collections. The valuation basis of these indexes is basic prices.

2.22. The proposed DFP index is the main subject of this paper. In section 4, a conceptual model for economy-wide price analysis is presented. The scope of the model relates to final purchases of goods and services in the Australian economy, whether sourced domestically or imported, with exports out of scope. The model adopts a market transactions approach and excludes both notional transactions and non-market goods and services.

2.23. The primary classification is between final consumption purchases and capital purchases; each of these categories can then be split into the relevant institutional sector, i.e. household, corporate (private and public), government and non-profit institutions serving households (NPISH) sectors. The indexes could be further disaggregated by commodity and split between imported and domestic components. The valuation basis of the index is purchasers’ prices.

2.24. In the short to medium term, the ABS proposes to develop a price index relating to the HCP component of the DFP model designed for analytical purposes (see section 5). It is also proposed to pursue the development of an experimental measure of underlying household inflation, involving adjusting for the effects on prices of changes in indirect taxes, seasonality and volatility (see section 6).

2.25. The Labour Cost Index (LCI), which is currently under development, relates to selected wage and non-wage labour costs incurred by employers (private and public sector), except those primarily engaged in Agriculture, forestry and fishing. The LCI will be implemented in stages. Initially, the index will be confined to wage costs only. The Wage Cost Index (WCI) (6345.0) will relate to wages and salaries paid in all jobs (except Australian permanent defence force jobs). At a later stage, additional information (e.g. paid leave, superannuation, workers’ compensation and payroll tax) will be collected to compile the full LCI. Indexes will be compiled for Australia, States and Territories, private and public sectors, and broad ANZSIC industry and Australian Standard Classification of Occupations (ASCO) groups.

2.26. The wage costs in the WCI relate only to cash remuneration to employees in the survey reference period (i.e. payments in kind are excluded). The information will be collected quarterly by mail questionnaire from a sample of employers.

2.27. ABARE produces two main price index series, namely:

      • Prices received by Australian farmers for their produce. Ideally the prices desired for these products are ‘farm gate’ prices. These are not normally available and so the next best prices are wholesale market prices: for example, livestock market prices, fruit and vegetable wholesale market prices. Indexes are aggregated using weights derived from ABS statistics on gross value of production, averaged over three years to even out volatile shifts caused by droughts, etc. For major commercial crops such as wheat, the current year’s prices are based on ABARE’s estimates. Other sources are major processors for produce such as milk, eggs and poultry who provide information on the average price paid to producers. The conceptual basis of the index is basic prices; therefore the weights are at basic prices. However, in practice the prices are collected at wholesale level and therefore include some margins.
      • Prices paid by farmers for their inputs. Theoretically, these are actual prices paid by farmers for inputs delivered to the farm. Price sources for most products and services are rural supplies stores, agricultural service providers etc. Actual prices paid at the midpoint of the quarter (or quarterly average if available) are requested. Price sources are dispersed geographically among major production areas. Weights for aggregating indexes are derived from the ABS Agricultural Financial Survey, averaged over two years. In concept, the valuation basis of the index is purchasers’ prices.

National accounts Implicit Price Deflators

2.28. Implicit Price Deflators (IPDs) (5206.0) for aggregate expenditure items are obtained by dividing a current price value by its corresponding constant price value. IPDs are published on a quarterly and annual basis for all items of expenditure shown in the domestic production account, except for the increase in stocks and statistical discrepancy items. When derived from the major national accounting aggregates, such as gross national expenditure, IPDs relate to a broader range of goods and services in the economy than that represented by any of the individual consumer and producer price indexes published by the ABS.

2.29. IPDs provide an estimate of the price change between the base period of the relevant constant price estimate and any other period, and reflect the quantity weights of this latter period. Because the weights change from period to period, IPDs do not compare the price of a constant basket of goods and services between any two periods except when comparing the base period and any other period. Therefore, changes in the value of an IPD from one period to another (neither of which is the base period) could be due to a change in price and/or a change in composition or relative quantities. As a result, the IPDs do not provide a pure price change measure. The valuation basis underlying the IPDs is purchasers’ prices.

National accounts Fixed-Weighted Price Indexes

2.30. In addition to the IPDs published for the major national accounts aggregates, the ABS publishes Fixed-Weighted Price Indexes (FWIs) (5206.0) of GDP, exports of goods and services, imports of goods and services, and of domestic final demand (DFD) and its four major components. These indexes are published quarterly. The FWIs have been formed by applying fixed weights to the detailed price indexes used to derive constant price estimates. The fixed weights are updated every five years, at the time of rebasing the national accounts. Being FWIs, they are not subject to the impact of changes in the composition of the underlying components, and so provide a measure of pure price change. The detailed price components of the FWIs are drawn from ABS consumer, producer and international trade price indexes, and wage and salary rates, as well as various sources outside the ABS. The valuation basis of the FWIs is purchasers’ prices.

2.31. Table 1 summarises, for each price measure, the valuation basis (where PP indicates purchasers’ prices and BV signifies basic prices), its status and the main classification(s) employed. The last column provides a link to the relevant Input Output (IO) table.


1:
SUMMARY OF PRICE MEASURES
Price measure
Valuation basis
Status
Main classification(s)
IO table

CPI
PP
established
commodity
2
HPI
PP
established
2
MUMI
PP
established
ANZSIC, IOCC
2
APMI
BV
established
ASIC, IOCC
3
HB
PP
established
material
2
OTHB
PP
established
material
2
PPI services
BV
being developed
ANZSIC, IOCC
3
EPI
PP (a)
established
AHECC
2
IPI
BV (b)
established
SITC
3
SOP
BV
being developed
SOP, GDP(E) categories ANZSIC, IOCC
3
Tradables
BV
experimental
importable, exportable non-tradable
3
DFP — HCP (c)
PP
proposed
GDP(E) categories, Institutional Sector
2
DFP — OTHER
PP
proposed
GDP(E) categories, Institutional Sector
2
LCI
PP
being developed
ANZSIC, ASCO
2
ABARE — recieved
BV
established
commodity
3
ABARE — paid
PP
established
commodity
2
National accounts IPDs
PP
established
GDP(E) categories
2
National accounts FWIs
PP
established
GDP(E) categories
2

(a) EPI f.o.b. is termed 'special purchasers' price' in the System of National Accounts (SNA) (15.36). In practice, this is generally the earliest point of pricing for which manufacturers, miners, etc. can report because they export directly rather than via wholesalers or agents. Thus, for such industries it is not possible to discern between purchasers' prices and basic prices. On the other hand, agricultural products are commonly sold via marketing authorities and attract a wholesale margin (fees, commissions, etc.). This is the pricing basis for agricultural products in the EPI and the prices would be inclusuve of such margins.

(b) IPI f.o.b. is, in fact, an earlier valuation basis than basic prices. A true basic price valuation would be c.i.f. (SNA 15.35)

(c) The proposed development includes an underlying household consumption price index.

Interrelationships between price measures

2.32. The interrelationships between each of the above price measures can be illustrated by reference to the framework used to produce the Australian Input Output tables. An Input Output absorption (or use) table has commodities and primary inputs in its rows, and using industries and final demand categories in its columns (see tables 2 and 3). It shows the flow of goods and services and the link from production to final demand.

2.33. Input Output tables (or matrices) can be presented in either of the two valuation bases described above, i.e. basic prices or purchasers’ prices.

2.34. Looking across the rows of a table in purchasers’ prices, the margin elements are included in the values of the flows of all the commodities which attract the margin; on the other hand, in a table in basic prices, the margin commodity flows (e.g. retail trade, road freight, etc.) are shown separately in their own right against the appropriate sector (e.g. transport).

2.35. Further, there are two alternative treatments of imported commodities in the tables; direct allocation and indirect allocation.

2.36. Direct allocation of imports involves allocating all imports directly to the sectors which use them (in which case they are reflected in row P6 in the lower part of the table; and the top half of the table thus refers only to the use of local products). On the other hand, indirect allocation means that imports are firstly added to the supply of the equivalent commodities produced in Australia and allocated across the corresponding row to the using sectors; the top half of the table thus contains imported and locally produced commodities aggregated together.

2.37. For a more detailed explanation of these concepts, see Australian National Accounts: Input-Output Tables, 1992–93 (5209.0).


2. INPUT OUTPUT TABLE, PURCHASERS' PRICES (PPI), INDIRECT ALLOCATION OF IMPORTS
2.38. Table 2, above, is valued at purchasers’ prices and has indirect allocation of imports and table 3 is valued in basic prices and has direct allocation of imports.

3.
INPUT OUTPUT TABLE, BASIC PRICES (BP), DIRECT ALLOCATION OF IMPORTS
2.39. The last column of table 1 indicates which of the two Input Output tables to refer to for an illustration of the broad economic scope of any particular price measure. The objective is to graphically illustrate the interrelationships between the various measures. The exercise also serves to highlight major coverage gaps and will be useful for determining priorities and programs for the extension of price measures.

2.40. Note that, as illustrated in table 2, there would be a high degree of overlap in the scope of the DFP–HCP and CPI measures. The relationship between the two indexes is explained in section 5.





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