Producer Price Index Manual: Theory and Practice ... - METAC

Producer Price Index Manual
C. Appropriate Weights and
Structure for PPI
(4.1)
I
cm ,
L
P q
m 0
i i
0 0
i i
= ∑ ∑ p q
C.1 Value weights
4.5 As discussed in Chapter 14, the value aggregate
from the national accounts framework that
aligns with the basic price received by the producer
of goods and services is the value of production.
Thus, when estimating the PPI using the weighted
average of long-term relatives formula (that is, the
current price divided by the base period price as in
equation 4.2 of Section C.2), the best approach
would be to have value of production weights at basic
prices for all levels of index aggregation (from
the elementary aggregate level of product/commodity
within the establishment to the total
output index by industry or product).
4.6 Since the PPI can also be used to measure
the change in intermediate input prices, the value
weights for the input index would be the cost of the
input products to the producer. In the supply and
use framework presented in Chapter 14, this value
would be the cost of intermediate inputs valued at
purchaser prices.
4.7 The use of values to weight long-term price
relatives (that is, the current price divided by the
base period price) maintains the fixed quantity relationship
that existed in the base period. The value
weight multiplied by the long-term price relative
provides the estimate of what it would cost at today’s
prices to produce the quantity of product in
the price reference period.
4.8 The value of production comprises the receipts
from sales of all output by establishments
and the change in value of inventories of finished
goods on hand at the end of the period. If the value
of production is unavailable or questionable because
of concerns about the estimation of inventories,
total sales (turnover) may be used. An analogous
measure would be the value of shipments (that
is, value of goods shipped at basic prices).
C.2 Quantity weights
4.9 In the traditional Laspeyres formula, base
period quantities can be used as weights to value
base period production volume at current period
prices. Consider the following:
where I L
c m is the Laspeyres price relative for subcategory
“c” in month “m,”
P i m is the average price of product “i” in
month “m,”
Q i 0 is the quantity of product “i” purchased
or sold in the base period “0,” and
P i 0 is the average price of product “i” in the
base period “0”.
The value in the numerator is often referred to as
the current value of base period production. It reflects
what the cost would be at current prices to
produce the quantity of output in the base period.
This current value of base period production is
compared with the base period value of production
in the denominator to derive the long-term price
relative.
4.10 The use of quantity weights is appropriate
as long as the same specific product was produced
as in the base period, that is, there is no qualitative
difference between the current product produced
and the base period product. If the price determining
characteristics among the various transactions
that are priced differ, then we have a dissimilarity,
and the transactions with different characteristics
should have separate weights.
4.11 Quantity weights are feasible only at the
detailed product level. At higher levels of aggregation,
such as at the product group level or industry
level, a value aggregate is more appropriate for calculating
the index because there are no unique,
meaningful quantity levels available that apply to
different products. 3 Thus, the index at the aggregate
level would be the ratio of the sum of the base period
quantities valued at current prices to the sum of
the base period values, as in equation 4.1, but the
values in the numerator are those summed from the
calculation of values for each of the products at current
prices. Alternatively, the simpler formulation is
3 This holds true unless one is willing to accept a notional
or implicit quantity measure that is a representative aggregate
of the different quality products being compiled. The
problem with this approach is that the implicit quantity
measure then must assume some type of average quality that
should be comparable over time.
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