6421.0 - Information Paper: An Analytical Framework for Price Indexes in Australia, 1997  
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Contents >> Chapter 4: The domestic final purchases model

The model

4.1. The scope of the price indexes under the DFP model is intended to reflect purchases by Australian residents. As such, it would include prices of imported items but exclude prices of exported items. Prices of imports would be included because they directly affect each institutional unit’s input prices to the extent that imports are reflected in their purchasing patterns. Similarly, prices received for exports would be excluded because, while they affect the incomes received by domestic institutional units, they do not have a direct bearing on their inflationary experiences through the prices they pay.

4.2. While the price measures could potentially reflect the prices of all domestic purchases (i.e. the ‘Total domestic purchases’ market in diagram 4), this would raise the issue of multiple counting involved when prices at various intermediate stages of production are included together with final transaction prices. A more meaningful aggregation would be one based only on final market purchases, excluding all intermediate purchases. The scope of such measures would relate to the markets represented by ‘Domestic final purchases’ in diagram 4.

4.3. This approach recognises that although many transformations take place in an economy (outputs of one firm become inputs of another), eventually a point can be identified where a good or service is exchanged in a market place for the last time. Therefore, if the price movements experienced by the final purchasers are recorded, it can be argued that the influences of the various price pressures experienced in earlier stages of the production process have been captured.

4.4. Purchases of financial assets, existing capital goods (e.g. established housing), labour and intermediate inputs would not be within the scope of the DFP model. On the other hand, purchases of newly produced and imported capital goods, which are generally treated as final transactions within the national accounts, would be within the scope of the model.

      Price Index of Domestic Final Purchases

4.5. Diagram 5 illustrates the range of price indexes under the DFP model, namely the economy-wide aggregate measure, the price index of DFP, along with its component indexes relating to:
      • HCP;
      • NPISH Consumption Purchases;
      • General Government Consumption Purchases
      • Household Capital Purchases;
      • Private Corporate Capital Purchases;
      • NPISH Capital Purchases; and
      • General Government and Public Corporate (Public Sector) Capital Purchases.

4.6. Conceptually, the scope of the DFP index is most closely aligned with DFD under the national accounting framework (the most notable difference being the exclusion of notional transactions), as opposed to GDP which involves the exclusion of imports and the inclusion of exports.

4.7. The following is a summary of the characteristics that a DFP index, and its component indexes, would possess. These characteristics conform to the ideal properties identified at the beginning of section 3. The index would:
      • relate to transactions in goods and services and thus not include interest rates (though in concept, interest rate margins which banks use as a substitute for direct charges for banking services, would be included for households);
      • include actual market transactions only, that is, exclude:
      • changes in stocks;
      • notional transactions; and
      • non-market goods and services;
      • be based on the purchaser’s perspective, with the valuation basis being at purchasers’ prices;
      • have an economy-wide scope;
      • include purchases by domestic residents only, and thus:
      • exclude exports; and
      • include imports;
      • include final transactions only (that is, be free of multiple counting);
      • reflect current expenditure weights using a chain index formula and adopt a pure price change approach; (The ABS released an information paper in mid-1997 which discussed the use of chain formulae for calculating measures of volume and price change, see 6422.0 - Information Paper: Producer Price Index Developments in this Library)
      • contain component indexes presented under different classification systems; and
      • form part of a broader statistical framework offering alternative, complementary views of the economy.

4.8. Under the DFP model, indexes would be available for consumption and capital purchases, split between the household, corporate (private and public), government and NPISH sectors. The intermediate purchases of private corporations and other institutions which produce marketed output (e.g. public corporations and some non-profit institutions) are not within the scope of the DFP index, as they do not represent final transactions. The institutional sector and transaction scope of the index is summarised in table 6.


    Institutional sector

    Yes (includes consumer durables)
    Corporations (private and public, financial and non-financial, including quasi-corporations)
    No — these are intermediate purchases
    General government
    Non-profit institutions serving households

4.9. Households are not included as a separate institutional sector in relation to capital expenditure in the Australian National Accounts (ANA). Instead, there is a notional private industry referred to as ‘ownership of dwellings’. The DFP index differs from the ANA as it explicitly refers to Household Capital Purchases, which would be mainly composed of purchases of new dwellings (though conceptually, purchases of new valuables would also be in scope). This would not affect the measure as a whole; rather, it would simply involve a separation of private gross fixed capital expenditure into that which is undertaken by households, and that which relates to private corporations.

4.10. The proposed treatment of NPISH and <<W0>>General Government Consumption Purchases also differs conceptually from the national accounting framework. The difference lies primarily in the treatment of goods and services which are sold at non-market determined, or economically insignificant, prices. Where goods and services are sold to households at economically insignificant prices, the purchase price is not included in the HCP index. Rather, the associated input purchases are regarded as the final market transactions. It is the prices of the inputs purchased by general government and NPISH which would feed into the DFP price measure.

4.11. Under the DFP model, an index framework could consist of the aggregate measure, with disaggregated price indexes being presented for each of its main components (e.g. HCP, Private Corporate Capital Purchases). These components could be disaggregated further to provide price indexes for key subcomponents under alternative classifications, for example by commodity (Household purchases of food, Private corporate purchases of machinery and equipment, etc.). Alternatively, the aggregate measure could be broken down by type of transaction (e.g. Consumption purchases/Capital purchases, Dwelling purchases/Machinery and equipment purchases) and by institutional sector (e.g. Household purchases, NPISH purchases). Other categorisations could be domestically produced and imported indexes, and goods and services indexes.

Complementary views

4.12. Price indexes under the DFP model form part of the broader market transactions statistical framework which embraces a wider family of price indexes providing complementary views of inflation. In addition to the DFP indexes, the wider family would include the SOP, the LCI and the EPI, each of which are described in section 2. Potentially, price indexes for existing assets could also be included.

4.13. Diagram 4 in section 3 illustrates how the markets measured by these complementary sets of price indexes could be integrated with those measured by the DFP index.

4.14. The scope of the DFP model is confined to final transactions and so cannot provide a complete picture of the price experience of the economy. The prices captured by DFP price indexes would be the outcome of an entire process of transactions at earlier points in the production and distribution chain. Some users are interested in price indexes which enable identification of price pressures arising from intermediate transactions, thus potentially identifying early inflationary signals. Such a complementary view will be provided by the indexes under the SOP model.

4.15. The SOP indexes will relate to the selling prices of the output (goods) of Australian industries at basic prices. That is, they will be output indexes viewed from the producers’ perspective. The aim is to augment the analytical value of the current range of partial producer and international trade price indexes through their presentation in an economy-wide framework.

4.16. In national accounting terms, the SOP model is broadly analogous to gross output under the production approach to the measurement of GDP (avoiding multiple counting by not aggregating the price indexes relating to each stage). The DFP model can be compared to the expenditure approach to GDP measurement.

4.17. A further complementary price measure is the LCI currently being developed by the ABS. Wage costs are a significant determinant of general price change, and so play a key role in any framework of price measures. A LCI for general government would be required specifically for the DFP price index.

4.18. The EPI is a further element of the statistical framework. The coverage of this index is currently limited to exports of merchandise. An extension of scope of the index to cover exports of services would be desirable. While changes in prices of exports do not figure directly in the inflationary experiences of domestic institutional units, they can have significant ‘second round’ effects to the extent that fluctuations in export incomes impact on the demand for domestically produced and imported goods and services. An EPI is therefore an important element of this broader framework.

4.19. Transactions relating to both existing assets (financial and non-financial) and new assets are important. The DFP price measure would reflect purchases of newly produced and imported fixed assets and net acquisitions of valuables, but not reflect purchases of second-hand fixed assets (e.g. established homes) or financial assets. In light of this, the broader prices framework would need to allow for the possible future development of price measures for existing assets, providing a further complementary view of inflation.

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