6429.0 - Producer and International Trade Price Indexes: Concepts, Sources and Methods, 2014  
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CHAPTER 15 THE SYSTEM OF PRICE STATISTICS


INTRODUCTION

15.1 The Australian Producer Price Indexes (PPIs) and International Trade Price Indexes (ITPIs) are part of a broader system of price statistics. A range of other price indexes produced by the Australian Bureau of Statistics (ABS) apply to different aspects of the economy. This chapter describes the use of these indexes to compile the Australian National Accounts. The inter-relationships between the different price indexes are illustrated by reference to the Input-Output (I-O) framework. A range of other derived measures of price change are also described.


PRINCIPAL PRICE INDEXES

15.2 The principal price indexes currently released by the ABS are:

  • Producer Price Indexes (PPIs)
  • International Trade Price Indexes (ITPIs)
      • Export Price Index (EPI)
      • Import Price Index (IPI)
  • Consumer Price Index (CPI)
      • Selected Living Cost Indexes (SLCIs)
  • Residential Property Price Index (RPPI)
      • Attached Dwellings Price Index (ADPI)
      • House Price Index (HPI)
  • Wage Price Index (WPI).

15.3 These price indexes are used for deflation purposes in providing summary measures of the volume of products (goods and services) produced and consumed. These price indexes are not only important tools in the design and conduct of the monetary and fiscal policy of the government, but also of great utility in economic decisions throughout the private sector. They provide an integrated and consistent view of price developments pertaining to production, consumption, and international transactions of products.


Direct measures of price change

15.4 The principal price indexes described above are direct measures of price change, in that they are derived through collecting and directly using price data. The CPI, RPPI and WPI are detailed in the following paragraphs.


Consumer Price Index (CPI)

15.5 The CPI is an input price index and measures changes in the price of a basket of goods and services which account for a high proportion of expenditure by Australian metropolitan households. Indexes are produced for each of the eight capital cities, for 11 broad groups of products made up of 87 expenditure classes. The CPI is published quarterly in Consumer Price Index, Australia (cat. no. 6401.0).

15.6 The valuation basis of the CPI 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.

15.7 The CPI has fixed weights that are updated approximately every six years following the release of the Household Expenditure Survey (HES).

15.8 The Selected Living Cost Indexes (SLCIs) (cat. no. 6467.0) provides indexes for four individual population subgroups: employee households; age pensioner households; other government transfer recipient households; and self-funded retiree households. Also included is the Pensioner and Beneficiary Living Cost Index (PBLCI) which provides an index for age pensioner and other government transfer recipient households whose principal source of income is government benefits.

The SLCIs inform users of the extent to which the impact of price change varies across these different subgroups of the Australian population.


Residential Property Price Index (RPPI)

15.9 The RPPI measures changes in the price of all residential dwellings within the Greater Capital City Statistical Areas (GCCSAs). Separate indexes are produced for each capital city in Australia, and these indexes are combined to produce a weighted average index of the eight capital cities. The RPPI is an aggregation of the House Price Index (HPI) and the Attached Dwellings Price Index (ADPI). The HPI measures quarterly changes in the price of the stock of established detached houses over time. The ADPI measures changes in the price of attached dwellings within the GCCSAs. Dwellings in scope of the ADPI are: flats, units and apartments; and semi-detached, row and terrace houses.

15.10 The valuation basis of the RPPI is purchasers’ prices, that is the price includes non-deductible taxes (for example Goods and Services Tax (GST) in the case of project homes).

15.11 The RPPI is published quarterly in Residential Property Price Indexes: Eight Capital Cities (cat. no. 6416.0).


Wage Price Index (WPI)

15.12 The WPI measures changes in the price employers pay for labour that arise from market factors. Specifically, the WPI measures changes in the price of wages and salaries. Wages and salaries reflect payments in cash or kind that are made at regular intervals (e.g. weekly, monthly) and include: piecework payments; enhanced or special allowances for working overtime or unsocial hours (e.g. nights, weekends); regular supplementary allowances (e.g. housing allowances, allowances to cover the cost of travel to and from work); payments for employees away from work for short periods (e.g. holidays) but not including absences for sickness or injury; and bonus and incentive payments.

15.13 The WPI measures the change in the price between the current period and the price at a given reference period with the quantity and quality of labour services being held constant.

15.14 The WPI is published quarterly in Wage Price Index, Australia (cat. no. 6345.0).


PRICE INDEXES AND THE VALUE AGGREGATE

15.15 A price index is only meaningful in relation to the basket to which it refers. The value aggregate is a measure that expresses the reference period quantities in terms of current period prices. For an input price index, a value aggregate is a measure of expenditure, and for an output price index it is a measure of revenue. A value aggregate, with prices from period t and quantities from period 0 is defined as: Formula

15.16 The value aggregate includes the specification of a group of included products (which items to include), the economic agents engaging in transactions involving those products (which transactions to include), as well as the valuation and time of recording principles motivating the behaviour of the economic agents undertaking the transactions (determination of prices). The included elementary items, their valuation (the pti), the eligibility of the transactions and the item weights (the q0i) are all included in the definition of the value aggregate.


PRICE INDEXES AND THE AUSTRALIAN NATIONAL ACCOUNTS

15.17 The Australian System of National Accounts (ASNA) provides a systematic statistical framework for summarising and analysing economic events, the wealth of an economy, and its components. The price indexes cover those value aggregates in the National Accounts system representing major flows of products and levels of tangible and intangible stocks. This section describes how the price indexes are related to components of the ASNA.

15.18 The ASNA is a systematic framework of statistics providing a wide range of information about the economy and its components. At their summary level, the accounts reflect key economic flows: production, income, consumption, investment and saving. At their more detailed level, they are designed to present a statistical picture of the structure of the economy and the detailed processes that make up domestic production and its distribution.


Supply and use of products in aggregate

15.19 At the most aggregate level, the supply and use of products in the National Accounts is the macroeconomic identity equating total supply with total use. Total supply is the sum of output, imports, margins and net taxes (taxes less subsidies on products). Total use is the sum of intermediate consumption, final consumption of households and government, capital formation, changes in inventories, and exports.

15.20 There are three approaches which can be used to measure Gross Domestic Product (GDP):
      1. the income approach (GDP(I)), which involves summing net factor incomes, consumption of fixed capital (depreciation) and taxes less subsidies on production and imports
      2. the expenditure approach (GDP(E)), which involves summing all final expenditures, changes in inventories and exports less imports of products
      3. the production approach (GDP(P)), which involves taking the value of products produced by an industry (i.e. output) and deducting the cost of products used up by the industry in the production process (i.e. intermediate consumption) and adding the result across all domestic industries. Taxes less subsidies are added on products if output is valued at basic prices, as recommended in the System of National Accounts, 2008 (2008 SNA).

15.21 GDP is internationally recognised as the central National Accounts aggregate for measuring national economic performance. It is a measure of production, as distinct from final demand. It measures the value added by the productive activity carried out by all the units resident in an economy. Compiling indexes for tracking the relative change in GDP and its components that can be attributed to price and volume change is one of the primary objectives for ABS price indexes.

15.22 The individual elements in the value aggregate equation represent detailed product flows that are classified into categories of transactions. There are two defining aspects of recording transactions: timing and valuation.


Timing of transactions covered

15.23 To associate each transaction with a date, the National Accounts use an accrual basis for accounting as per 2008 SNA. Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished. This means that flows that imply a change of ownership are entered when the change occurs, services are recorded when provided, output at the time products are created and intermediate consumption when materials and supplies are being used.


Valuation

15.24 There are two valuation principles in the National Accounts, one for suppliers and one for users. For suppliers, transactions in products are to be valued at basic prices. The basic price is the price per unit of product receivable by the producer. As the producer does not receive taxes (if any) on products, but does receive subsidies (if any) on products, taxes on products are excluded from the basic price, while subsidies on products are included. Subsidies artificially reduce the sale price so they are included in the basic price to obtain a measure of the true value of products produced. Taxes on products, if included, would artificially increase the price and so are excluded. Separately invoiced transportation charges paid by consumers, or any distribution margins added by other, retail/wholesale service producers are also excluded from the basic price. On the other hand, the user, as purchaser, pays all of these charges, and users’ purchases are therefore valued at purchasers’ prices, which add taxes net of subsidies on products and margins for included transportation, insurance, and distribution services to the basic price.

15.25 Accordingly, output and imports are valued at basic prices, to which are added taxes less subsidies on products (net taxes) and margins to arrive at total supply. The components of total uses (including both final expenditure and intermediate consumption) are valued at purchasers' prices. This is interpreted for the final consumption of households and government. For capital formation expenditures, the notion of purchasers’ prices also includes the costs of setting up fixed capital equipment. For exports, purchasers’ prices include export taxes net of subsidies, according to the free on board (f.o.b.) value at the Australian customs frontier.


Use of price indexes in National Account component aggregates

15.26 The PPIs and ITPIs are used in the production and expenditure approach to measure real GDP. GDP using the income approach is compiled only in current prices and does not directly utilise price indexes; proxy volume estimates are produced for this approach using the implicit price deflator (IPD) from the expenditure account (the IPD is detailed below under the discussion on Derived Measures of Price Change).

15.27 The ABS price indexes used in compiling the National Accounts are not the only mechanisms used to derive volume measures. Other techniques include direct volume measurement and the use of quantity revaluation (i.e. multiplying current period quantities by a reference period unit value) in calculating volumes of homogeneous export products such as wheat and coal). Quantity revaluation can be seen as conceptually consistent with deflation using average unit values as opposed to price indexes, average unit values can differ to equivalent price indexes due to changes in quality and composition. In some circumstances price indexes are combined to produce aggregate deflators (for example, combining a WPI component with a PPI component). These composite measures are required when the value aggregate from the National Accounts has a broader scope than the contributing price indexes.
THE INPUT OUTPUT FRAMEWORK

15.28 The Input-Output (I-O) tables form an integral part of the ASNA. They present a comprehensive picture of the supply and use of all products in the economy, and the incomes generated from production. They also provide a much more detailed disaggregation of gross domestic product than is available in the national income, expenditure and production (GDP) accounts.

15.29 They provide a framework for checking the consistency of statistics on flows of goods and services obtained from quite different kinds of statistical sources - industrial surveys, household expenditure inquiries, investment surveys, foreign trade statistics, etc. The ASNA, and the I-O tables in particular, serves as a coordinating framework for economic statistics, both conceptually for ensuring the consistency of the definitions and classifications used and as an accounting framework for ensuring the numerical consistency of data drawn from different sources. The I-O framework is also appropriate for data estimation purposes, and for detecting weaknesses in data quality and estimation. By providing information on the structure of, and the nature of product flows through the economy, the I-O tables assist in the decomposition of transactions into prices and volumes for the calculation of an integrated set of price and volume measures. As an analytical tool, input-output data are conveniently integrated into macroeconomic models in order to analyse the link between final demand and industrial output levels.

15.30 I-O tables can be presented in either basic prices or purchasers’ prices. Looking across the rows of a table at purchasers’ prices, the margin elements are included in the values of the flows of all the products which attract the margin; on the other hand, in a table at basic prices, the margin product flows (e.g. retail trade, road freight, etc.) are shown separately in their own right against the appropriate industry (e.g. transport). Note that as per the 2008 SNA definition of basic prices, transport costs are included in basic prices of other products in those cases where the transport service is not separately invoiced.

15.31 There are two alternative treatments of imported products in the tables: direct allocation and indirect allocation. Direct allocation of imports involves allocating all imports directly to the industries which use them. All flows recorded in quadrants 1 and 2 refer only to the use of domestic products, and consequently quadrant 1 does not reflect the technological input structure of the industry. Indirect allocation of imports involves first recording all imports as adding to the supply of the industry to which they are primary and then allocating this supply along the corresponding row of the table to using industries. The result is that flows in quadrants 1 and 2 contain imported and domestically produced products without distinction. Quadrant 1 then better reflects the technological input structure of the industry and quadrant 2 better reflects the product composition of final demand.

15.32 For a more detailed explanation of these concepts, see Australian System of National Accounts: Concepts, Sources and Methods (cat. no. 5216.0).

15.33 The tables below are valued at basic and purchasers’ prices with Output indexes - I-O framework at basic prices (Table 15.1) and Input indexes - I-O framework at purchasers’ prices (Table 15.2).


DERIVED MEASURES OF PRICE CHANGE

National Accounts chain price indexes

15.34 Chain price indexes published quarterly in the National Accounts are annually reweighted . Chain price indexes are obtained by first weighting together elemental price indexes from the previous financial year to the current financial year to produce annual indexes, or to quarters in the current financial year to produce quarterly indexes, where the weights are calculated using expenditure shares of the previous financial year. Second, the resulting aggregate year-to-year or year-to-quarter price indexes are linked (compounded) together to form a time series. Third, the time series is referenced to 100.0 in the reference year. All quarterly indexes are benchmarked to annual indexes.

15.35 Chain price indexes are published in Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0).


Implicit price deflators

15.36 In addition to the chain price indexes published for the major National Accounts aggregates, the ABS publishes a range of IPDs. An IPD is obtained by dividing a current price value by its real counterpart (the chain volume measure). When calculated from the major national accounting aggregates, such as GDP, IPDs relate to a broader range of goods and services in the economy than that represented by any of the individual price indexes published by the Australian Bureau of Statistics. Movements in an implicit price deflator reflect both changes in price and changes in the composition of the aggregate for which the deflator is calculated.

15.37 IPDs do not compare the price of a constant basket of products (goods and services) between any two periods. IPDs calculated from quarterly aggregates are more likely to be affected by changes in the physical composition of those aggregates. As much of the period-to-period change in the physical composition is of a seasonal nature, IPDs derived from seasonally adjusted data are normally more reliable measures of price change than those calculated from unadjusted data. However, seasonally adjusting the series may not completely eliminate the impact of seasonal changes on the derived IPDs. IPD's are weighted using current period weights and are conceptually a Paasche price index.

15.38 IPDs and chain price indexes are published for expenditure components of GDP.

15.39 IPDs are published quarterly as part of Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0), and Balance of Payments and International Investment Position, Australia (cat. no. 5302.0).

15.40 Period-to-period movements in fixed-weight price indexes are generally consistent with those for chain price indexes for indexes with similar coverage. The chain price indexes are considered the most suitable indexes for measuring actual price change, as the effects of compositional change are excluded from these indexes whereas IPDs are affected by compositional change. Both chain price indexes and IPD's are subject to ongoing revisions, in line with revisions to underlying GDP weights.

TABLE 15.1 OUTPUT INDEXES, PPI AND ITPI COVERAGE, INPUT-OUTPUT FRAMEWORK AT BASIC PRICES
IMAGE: OUTPUT INDEXES, PPI AND ITPI COVERAGE, INPUT-OUTPUT FRAMEWORK AT BASIC PRICES


TABLE 15.2 INPUT INDEXES, PRICE INDEX COVERAGE, INPUT-OUTPUT FRAMEWORK AT PURCHASERS' PRICES
 IMAGE: INPUT INDEXES, PRICE INDEX COVERAGE, INPUT-OUTPUT FRAMEWORK AT PURCHASERS' PRICES



WHICH PRICE SERIES SHOULD I USE?

15.41 There are a wide range of price indexes produced by the ABS which are used for indexation, research and analysis. Although the ABS acknowledges that the various price indexes it publishes are used in indexation clauses, it neither endorses nor discourages such use. The ABS has prepared information for users that set out a range of issues that should be taken into account by parties considering an indexation clause in a contract using an ABS published price index. This paper Use of Price Indexes in Contracts is available on the ABS website and in appendix 1 of this publication.

15.42 The index or indexes selected will affect the price change recorded and should be chosen carefully to best represent the set of items. A description of what each price index measures is available on the ABS website which will assist in the decision of which index to use. For more information about what data is available, please contact the ABS National Information and Referral Service on 1300 135 070.