6422.0 - Information Paper: Producer Price Indexes Developments, 1999

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 25/03/1999

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Contents >> PART A - EXPERIMENTAL INDEX NUMBERS WITHIN A STAGE OF PRODUCTION FRAMEWORK >> Chapter 2. The SOP concept

2.1 Under the SOP concept, flows of commodities (goods and services) are 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 categorisation is between final commodities (i.e. commodities destined for final consumption, capital formation or export) and non-final commodities (i.e. commodities that flow into intermediate consumption for further processing).

2.2 This initial breakdown of the commodity flows into final and non-final commodities represents a useful economic dissection of producers’ transactions. However, the non-final commodities can flow into the production of both final and other non-final commodities.

2.3 Therefore, to aid analysis, the non-final commodity flows can be divided on a sequential basis between Stage 1 (or preliminary) commodities and Stage 2 (or intermediate) commodities, as illustrated below. This approach would generate three separate stages of production.

2.4 In order to avoid a multiple counting of transactions, the three stages are not aggregated.

2.5 Under such a framework, preliminary (Stage 1) commodities are used in the production of intermediate (Stage 2) commodities; in turn, intermediate (Stage 2) commodities flow into the production of final (Stage 3) commodities. For each of the three stages, commodities can be categorised into domestic production and imports. The final (Stage 3) commodities can be further divided between capital, consumption and exports.

2.6 The framework allows for analyses of price change as commodities flow through production processes. Price indexes for earlier stages of production may be indicators of possible future price changes for later stages.

2.7 The scope of the SOP framework is broadly analogous with that of gross output under the production approach to the measurement of Gross domestic product (GDP(P)) in the national accounts system.