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

Producer Price Index Manual
B.2.6 Summary
7.70 A number of points emerge:
• (i) Data availability will dictate which of the
four approaches to quality adjustment—
imputation, comparable substitution, overlap
price, and explicit adjustment—are used in
practice.
• (ii) The Manual distinguishes between uservalue
and hedonic (Section E.4) methods of
explicit quality adjustment. The user-value
method of explicit quality adjustment for input
price indices is the logical analog to the resource
cost method for output price indices
and generally is not equivalent to the hedonic
method (see Chapter 21).
• (iii) The Manual broadly prefers overlap
price, hedonic, and, when there are similar
price trends for new products as compared
with old, imputation methods of quality adjustment;
these approaches do not require special
assumptions about technology.
(iv) The Manual recognizes that statistical offices
will still find the traditional resource cost
technique to their first choice among the second-best
methods for making quality adjustment
to output price indices. This occurs
when information is too limited to do overlap
price or hedonic quality adjustment, or the
quality level is thought to affect the rate of
price change, thus excluding the imputation
approach. Resource cost nevertheless requires
care when applied to industries with falling
unit costs and improved quality of output or
varying profit margins.
(v) When resource cost (user value) is the best
available technique, it should be applied to
output (input) price indices, ensuring consistency
with the method’s microeconomic
foundations.
(vi) The Manual advises that quality adjustment
methods should use basic price valuations,
rather than a mixture of basic prices for supsubsidies
on products. Unlike quality differences among
goods and services over time, nonproportional changes in
taxes and subsidies on products seem to have unequal volume
implications for goods and services aggregates between
suppliers and users. This is beyond the subject of this
Manual but deserves further research and elucidation elsewhere
in work on price and volume measurement for the
national accounts.
ply aggregates (output PPIs) and purchasers’
prices for uses aggregates (input PPIs and the
CPI) to maintain consistency between supply
and use volume measures.
C. An Introduction to Methods
of Quality Adjustment When
Matched Items Are Unavailable
C.1 Introduction
7.71 It may be apparent from the preceding text
that quality adjustments to prices are not going to
be a simple issue or involve routine mechanical
methods whereby given methodologies are applied
to prices in specified industries to yield adjustments.
A number of alternative approaches will be
suggested, and some will be more appropriate than
others for specific items regardless of their industrial
group. An understanding of the technological
features of the producing industry, the product
market, and alternative data sources will be required
for the successful implementation of a quality-adjustment
program. Specific attention must be
devoted to product areas with relatively high
weights and where large proportions of products
are turned over. Some of the methods are not
straightforward and require some expertise, although
methods learned and used on some products
may be applicable elsewhere. The issue of
quality adjustment is met by developing a gradual
approach on an industry-by-industry basis. It is
emphasized that such concerns should not be used
as reasons to obviate the estimation of qualityadjusted
prices. The practice of statistical agencies
in dealing with missing products, even if it is to
ignore them, implicitly involves a quality adjustment,
and the form of the implicit one undertaken
may not be the most appropriate one and may even
be misleading. The extent of quality changes and
the pace of technological change require that appropriate
methods be used.
7.72 To measure aggregate price changes, a
representative sample of products are selected
from a sample of firms along with a host of details
that define each price, including details on the
conditions of the sale where relevant. This is to establish
an insight into the price basis of the product.
This is then followed by a periodic survey for
which the firms report prices (reprice the product)
each month for these selected products. They do so
154