6429.0 - Producer and International Trade Price Indexes: Concepts, Sources and Methods, 2014  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 20/08/2014   
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CHAPTER 5 SCOPE, COVERAGE AND CLASSIFICATIONS


SCOPE

5.1 The scope of the Producer Prices Indexes (PPIs) is all flows of products within the Australian economy. The PPIs are designed to measure the average price change of products in the entire economy either as they leave the place of production or as they enter the production process. The purchase price of products to be consumed in production (inputs), and the sale price of products by producers (outputs), on a gross industry basis are used to compile the PPIs.

5.2 The Australian Bureau of Statistics (ABS) PPIs output price indexes measure changes in prices received by the producing industries. These indexes measure the change in prices received by domestic businesses regardless of whether the sale of the product was to a domestic purchaser or as an export.

5.3 The ABS PPIs input price indexes measure changes in prices paid by the producing industries. These indexes measure the change in prices paid by domestic businesses regardless of whether the purchase was of a domestically produced product or as an imported product.

5.4 The International Trade Price Indexes (ITPIs) measure the change in prices of merchandise that crosses the Australian customs frontier. The populations of interest for these price indexes are all imported goods (for the Import Price Index) and all exported goods (for the Export Price Index). In the future the ABS will broaden the scope of the ITPIs to include International Trade in Services as stated in the Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004).


Whole of economy measures

5.5 The ABS produces a set of economy wide price indexes using a Stage of Production (SOP) approach, which in concept measures outputs at basic prices. As the focus in the use of the PPIs is on domestic inflation, exports are excluded from the headline SOP series final demand products. Imports have been incorporated within the framework, recognising that they represent an important potential source of inflationary pressure (imports are allocated to the competing domestic industry of origin but measured on a free on board (f.o.b.) pricing basis). Progressive improvement in the coverage of services industry PPIs will be incorporated in the SOP indexes.


Non-market goods and services

5.6 Non-market activities involve products produced by non-profit institutions serving households (NPISHs) or government that are supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole. These comprise both non-market services provided to individuals (such as health and education services) where a specific transaction can be identified but there is no economically significant price; as well as collective services (such as public administration and defence) where no individual transactions can be identified as the services are consumed by the entire population, indirectly, continuously and largely involuntarily. For more information on non-market activities refer to the Australian System of National Accounts: Concepts, Sources and Methods 2012 (cat. no. 5216.0).

5.7 Non-market activities have been historically excluded from the scope of PPIs due to the fact that no market transaction takes place and therefore no change in transaction price can be measured. For this reason, most countries define non-market activities as falling outside the scope of PPIs.

5.8 The Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004) states that the basis of PPIs and ITPIs are to capture price movements for all products represented in the Input-Output (I-O) framework. Therefore, non-market activities should be captured. Where the non-market activity resembles a market activity (for example, education), the market price index may serve as a proxy for a non-market price movement. However, some non-market activity where market equivalents are unavailable (for example, national defence) is valued at production cost, and there is no basis for constructing an explicit price index. The ABS will investigate how to reflect products such as non-market prices (as represented in the Australian National Accounts) within the PPI release.


VALUATION BASIS

5.9 Producer Price Indexes (PPIs) are designed to measure price change. In describing and defining a PPI, it is essential to ensure that the definition of price is both consistently measured and understood by the users of the index.

5.10 Price is defined as the value placed on a product at the point of transaction.

5.11 However, the buyer and seller may place a different value on the product, depending upon how indirect taxes, subsidies and transport charges are recorded. For example, the price a manufacturer receives for the direct retail sale of a product such as a motor vehicle is not the same price that a consumer would pay for the product because the consumer must pay Goods and Services Tax (GST) and delivery charges.

5.12 The System of National Accounts (SNA) refers to three special types of valuation bases: basic prices, producers' prices and purchasers’ prices.


Basic prices and producers' prices

5.13 The SNA uses two kinds of output prices, basic prices and producers' prices.

5.14 The basic price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, minus any tax payable, plus any per unit subsidy receivable on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer. However, delivery charges that are not separately invoiced are included in the basic price.

      Basic price = the amount received by the producer from the purchaser plus any subsidies received on a product
      Includes:
          (i) subsidies on products
          (ii) other taxes on production (for example, carbon tax)
      Excludes:
          (i) taxes on products (for example, GST, excise)
          (ii) other subsidies on production
          (iii) retail and wholesale margins
          (iv) insurance and transport charges separately invoiced.

5.15 The producers’ price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, including any tax that is incorporated within the sales price and excluding any subsidy that reduces the sales price, on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer but includes delivery charges not separately invoiced.
      Producers’ price = the amount received by the producer from the purchaser
      Excludes:
          (i) deductible taxes on products (for example, GST) invoiced to the purchaser and subsidies on products
          (ii) retail and wholesale margins
          (iii) insurance and transport charges separately invoiced.

5.16 The producers’ price and the basic price are two measures of output prices (that is, prices receivable). They differ in the way they treat non-deductible taxes on products, and producers’ subsidies on products.

Producers’ price = Basic Price
      plus (Producers’) non-deductible taxes on products
      minus (Producers’) subsidies on products.

5.17 Neither the producers’ nor the basic price includes any amounts receivable in respect of GST, or similar deductible taxes. The difference between the two is that to obtain the basic price, any other tax payable per unit of output is deducted from the producers’ price while any subsidy receivable per unit of output is added.

5.18 In the context of the Australian PPIs, the output price indexes measure changes in basic prices. Output is recorded at basic prices; any tax on the product actually payable on the output is treated as if it were paid by the purchaser directly to the government instead of being an integral part of the price paid to the producer. Any subsidy on the product is treated as if it were received directly by the purchaser and not the producer. The basic price measures the amount retained by the producer and is, therefore, the price most relevant for a producer's decision-making.


Purchasers' prices

5.19 The purchasers’ price is the amount paid by the purchaser in order to take delivery of products. Purchasers' prices include any taxes payable (less any subsidies receivable) on production and imports, and any transport charges paid separately by the purchaser to take delivery of goods. In the context of the Australian PPIs, which measure purchases by producers, the input price indexes exclude the GST, since the GST is generally deductible from the purchaser's own GST tax liability.


Free on board

5.20 Both the Import Price Index and the Export Price Index are valued using a free on board (f.o.b.) pricing basis. The value of products measured on an f.o.b. basis includes all production and other costs incurred up until the products are placed on board the international carrier for either export or import. Free on board values exclude international insurance and transport costs. They include the value of the outside packaging in which the product is wrapped, but do not include the value of the international freight containers used for transporting the products.


COVERAGE

5.21 In concept, the SOP indexes are intended to incorporate all flows of products within the economy. While coverage of goods producing industries is relatively comprehensive, the coverage of services industries is being progressively improved. The expansion of Services industries price indexes coverage is a key objective for the ABS and consultation with users has helped to determine the priorities for the Australian Services Producer Price Indexes Development program which aims to progressively improve the coverage in these areas.


Export and import coverage within the PPI

5.22 On a conceptual basis, the inclusion of exports and exclusion of imports conforms to the measurement of output price change consistent with index use for the purpose of deriving chain volume estimates of Gross Domestic Product (GDP). In contrast, the inclusion of imports and exclusion of exports is consistent with demand-based index use. Both formulations are highly meaningful for a variety of important data users (see Chapter 2). Consequently, the ABS includes exports (on an f.o.b. basis) in output price indexes, and imports (on a cost insurance and freight (c.i.f.) basis) in input price indexes, since the key use of such indexes is in the production of the Australian National Accounts. On the other hand, the whole of economy inflationary measures provided by the Stage of Production PPIs exclude exports, but includes imports on an f.o.b. basis.


CLASSIFICATION

5.23 Classifications are a set of defined groupings or categories, based on common relationships, into which all members of statistical units can be divided or arranged. These groupings or categories can be ordered systematically, and must be mutually exclusive and exhaustive.


Importance of classifications in price statistics

5.24 The classification structure forms the index structure, and determines which products from which industries of the economy are needed to construct price indexes. Further, the classification serves as the basic language allowing sources of value data and price indexes to have a direct concordance.

5.25 Classifications enable an exact definition of which products are to be included in an index, and provide a meaningful and cohesive structure for reporting on price movements for different subsets of the price basket.


International and local classifications

5.26 The ABS uses many international and local classification systems. In the price index context, the availability of value data will dictate the lowest level of detail that might be possible. Although a classification may be conceived according to economic theory or user requirements using a top-down approach, in application the ABS collects data about individual products and then aggregates them according to the classification structure (i.e. a bottom-up approach).

5.27 In application, products used in the compilation of the PPIs and ITPIs can be classified according to more than one classification structure. See Appendix 2 for a list of classifications.