In general, prices of individual shipments are obtained from major importers and exporters of the selected items and relate to the quarter in which the imported goods physically arrive in Australia and the exported goods physically leave Australia.
Imports are priced on a 'free on board' (f.o.b.), country of origin basis. Therefore freight and insurance charges involved in shipping goods from foreign to Australian ports are excluded from the prices used in the index, as are Australian import duties and taxes. Similarly, exports are priced on a f.o.b. basis at the main Australian ports of export. Exports are exempt from taxes on products.
The Import Price Index and Export Price Index employ the use of exchange rates where the contractual currencies of transactions are recorded in currencies other than Australian dollars. While a proportion of Australia’s international trade is conducted in Australian dollars, those that are traded in foreign currencies require conversion to Australian dollars. Hence changes in the relative value of the Australian dollar against overseas currencies (in particular, the major trading currencies such as the United States dollar, Japanese yen, Pound sterling and Euro) has a direct impact on the price of products purchased or sold in foreign currencies. That is, when the Australian dollar appreciates, it buys more foreign currency, and the Australian dollar commodity price falls. Conversely, when the Australian Dollar depreciates, it buys less foreign currency and the Australian dollar price of the commodity rises. As noted, imports are priced on a country of origin basis. Therefore the exchange rates applied are impacted by the differences between the date of transaction (ownership change) and the shipping time from the country of origin to Australia.
The main pricing methodology used is specification pricing, under which a manageable sample of precisely specified products is selected, in consultation with each reporting business, for repeat pricing. In specifying the products, care is taken to ensure that they are fully defined in terms of all the characteristics which influence their transaction prices. As such, all the relevant technical characteristics need to be described (e.g. make, model, features) along with the unit of sale, type of packaging, conditions of sale (e.g. delivered, payment within 30 days), etc. The goods are also specified by country and market in order to lessen the impact of price variations attributable solely to changes over time in the mix of countries, or markets.
When the quality or specifications of an item being priced change over time, adjustments are made to the reported prices so that the index captures only pure price change. That is, any element of price change attributable to a change in quality is removed. If there is an increase (decrease) in the quality of an item, then the price index is adjusted downwards (upwards) to reflect the 'worth' of the quality change. This technique is known as pricing to constant quality.
Wherever possible, prices from volume selling products being traded with predominant countries, or markets, are obtained to ensure specifications have a good chance of being re-priced over time and index series are representative of overall price movements. Individual product weights and weights between markets and countries are regularly reviewed to keep the indexes up to date. The ABS has access to a rich source of international merchandise trade data and selectively uses average unit values in the Export Price Index, and to a limited extent in the Import Price Index, to augment specification pricing. Imported commodities are typically more stable in price but non-homogenous in character, and generally do not lend themselves to measurement by average unit value.