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6427.0.55.005 - Implementation of the Review of the Producer and International Trade Price Indexes , 2012  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 28/09/2012  First Issue
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Contents >> Chapter 3: Description of the Producer Price Indexes weighting patterns: sources and methods




DESCRIPTION OF THE PRODUCER PRICE INDEXES WEIGHTING PATTERNS: SOURCES AND METHODS


3.1 As index numbers, the Producer Price Indexes (PPIs) are computed as the weighted averages of the price movements of the many products for which prices are collected. For an input price index, the average is weighted to reflect the importance of each priced product in terms of its share of total purchases in the market. For an output price index, the average is weighted to reflect the importance of each priced product in terms of its share of total market revenue.

3.2 The weights are key elements in the construction of the PPIs. They determine the impact that a price change for a particular industry will have on the overall index. For example, a 5% rise in the price of crude petroleum products has a much greater impact on the average rate of price change for purchases of the manufacturing sector than a 5% increase in the price of paper products, because the expenditure value of crude petroleum products is higher than that for paper. Without explicit weights, relative price changes for all commodities in the price basket would be given equal importance in calculating the index above.

3.3 One of the key outcomes of the review was for the Australian Bureau of Statistics (ABS) to re–weight the individual PPIs and Stage of Production (SOP) indexes based on the 2007–2008 Input–Output (I–O) tables. The ABS has also committed to increase the frequency of re–weighting the PPIs in line with international recommendations to update weights at a minimum of once every five years. The ABS will undertake additional research to firm up the possibility for more frequent PPIs re–weighting. The schedule of release of the Australian National Accounts I–O tables will influence this outcome.

INDUSTRY APPROACH TO RE–WEIGHTING

3.4 The ABS investigated whether changes could be made to the suite of PPIs (excluding SOP and International Trade Price Indexes (ITPIs)) to improve their usefulness for the compilation of the Australian National Accounts and Balance of Payments.

3.5 The basis of the producer price input indexes, when aggregated prior to the review implementation in the September quarter 2012, relates to selected products used by an industry for the production of their output. The input index basis therefore, relates to the selected products of the column of an I–O table (at purchasers' prices). The basis of the producer price output indexes, when aggregated, includes produced products primary to the industry that are sold or transferred within or outside that industry (for further processing, consumption, used as capital equipment, or exported). The output index basis therefore relates to the rows of an I–O table (at basic prices).

3.6 To provide a more useful view of the Australian economy, from the September quarter 2012, the ABS input and output PPIs, when aggregated, represent the industry dimension of the I–O framework, that is, the columns form the basis of the indexes.

3.7 By changing the basis of the output indexes, the interpretability of the indexes have been improved, as an industry basis will simplify the meaning of the indexes, (i.e. indexes will represent the inputs or outputs of a given industry) and provide coherence with Australian National Accounts estimates. For more information on producer price indexes and the System of National Accounts 2008 (2008 SNA) please refer to Appendix 2: Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004).

3.8 The adoption of the industry approach to re–weighting the suite of PPIs has changed the weights and composition of the indexes. For input indexes, weights now include all inputs for that industry, rather than just selected inputs. For example, the index 'Input to the Manufacturing industries' previously included the inputs for four ANZSIC Divisions (A–D). From September quarter 2012, inputs from all Australian and New Zealand Standard Industrial Classification(ANZSIC), 2006 edition Divisions (A–S) have been included in the index. For output indexes, such as 'Output of the Services industries', weights for secondary production rather than just primary production, have been added to the index. The definition of secondary production according to 2008 SNA is an activity carried out within a single producer unit in addition to the principal activity and whose output, like that of the principal activity, must be suitable for delivery outside the producer unit. The value added of a secondary activity must be less than that of the principal activity, by definition of the latter. The output of the secondary activity is a secondary product. In practice this meant the output of a product was considered secondary production if it was delivered outside the industry group (i.e. Input – Output Industry Group). Most producer units produce at least some secondary products.

3.9 For more information on the use of the industry approach, see Chapter 3: Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004).


USE OF INPUT–OUTPUT (I–O) TABLES TO RE–WEIGHT THE UPPER LEVELS

3.10 The key sources of data for upper level weights for the PPIs are the Australian National Accounts I–O tables. The supply table from the input–output framework shows the output value of product groups by source industry. The product detail tables show a finer disaggregation of supply, showing a comprehensive breakdown of output values at the product level. These data are used as sources for the upper level weights for output price indexes.

3.11 For example, when the supply tables are valued in basic prices, the data are used to develop weights for the price indexes for the output of the Manufacturing industries, of the Construction industries of the Services industries, and price indexes for the stage of production producer price indexes.

3.12 The use table from the input–output framework shows use of product groups by industry of consumption. These data are used as sources for the upper level weights for input price indexes. For example, when valued at purchasers’ prices these data are used to develop weights for the price indexes for the Input to the Manufacturing industries.

3.13 More information on the input–output framework can be found in:



USE OF BUILDING ACTIVITY CONSTRUCTION SURVEY DATA

3.14 The ABS data from the BACS was used to supplement the Australian National Accounts Input–Ouput (I–O) data for re–weighting the published indexes in Table 15: Output of the Construction industries. I–O data is only available at the national level, BACS data was required to derive splits by state to re–weight at the state level. BACS data was also used to split the Input – Output Industry Group (IOIG) '3001 Residential Building Construction' into the two published ANZSIC 2006 Classes of '3011 House Construction' and '3019 Other Residential Building Construction'. For more information on BACS data, see Building Activity, Australia (cat. no. 8752.0).

PRICE UPDATING

3.15 The 2007–08 I–O tables provide the information on the value of inputs to, and outputs of Australian industries. Value data can be broken down into a price component and quantity component. Weights were derived from the 2007–08 value data and then price updated to June quarter 2012. Therefore, the weights used reflect the 2007-2008 weighting information for quantities and prices (June quarter 2012).

3.16 Price updating was applied to all indexes with the exception of the ANZSIC 2006 Class '2421 Computer and electronic office equipment manufacturing'. Price updating for this class may lead to underestimation of the weight in the PPIs due to the relatively high volume growth in quality (features) of these high technology goods compared to other products in the PPIs.

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