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

7. Treatment of Quality Change
to the same specifications, that is, on the same
price basis. The detailed specifications are included
on the repricing form each month as a
prompt to ensure that the price basis has remained
the same. Respondents must be aware of the need
to report the details of any change in the price basis;
confusion may lead to biased results. It must
be borne in mind that firms have no incentive to
report such changes since this will invariably involve
additional work in costing the change. Attention
should also be devoted to ensuring that the description
of the price basis contains all pertinent,
price-determining elements. If an element is excluded,
any change is much less likely to be reported.
In both of these cases, the quality change
would be invisible to the price measurement process.
C.2 Methods for making quality adjustments
7.73 When a product is missing in a month for
reasons other than being off-season or off-cycle,
the replacement may be of a different quality—the
price basis may have changed, and one may no
longer be comparing like with like. A number of
approaches exist for dealing with such situations
and are well documented for the CPI, as outlined
in Turvey, and others (1989); Moulton and Moses
(1997); Armknecht, Lane, and Stewart (1997);
Moulton, LaFleur, and Moses (1998); and Triplett
(2002). Though the terms differ among authors and
statistical agencies, they include
• Imputation—When no information is available
to allow reasonable estimates to be made of
the effect on price of a quality change. The
price change of all products—or of more or
less similar products—are assumed to be the
same as that for the missing product.
• Overlap—Used when no information is available
to allow reasonable estimates to be made
of the effect on price of a quality change but a
replacement product exists in the same period
as the old product. The price difference between
the old product and its replacement in
the same overlap period is then used as a
measure of the quality difference.
• Direct comparison—If another product is directly
comparable, that is, so similar it has
more or less the same quality characteristics as
the missing one, its price replaces the unavailable
price. Any difference in price level between
the new and old is assumed to be because
of price changes and not quality differences.
• Explicit quality adjustment—When there is a
substantial difference in the quality of the old
and replacement products, estimates of the effect
of quality differences on prices are made
to enable quality-adjusted price comparisons.
7.74 Before outlining and evaluating these
methods. On should say something about the extent
of the problem. This situation arises when the
product is unavailable. It is not just a problem
when comparable products are unavailable, for the
judgment as to what is and what is not comparable
itself requires an estimate of quality differences.
Part of the purpose of a statistical metainformation
system for statistical offices (outlined
in Chapter 8) is to identify and monitor the sectors
that are prone to such replacements and determine
whether the replacements used really are comparable.
7.75 Quality adjustment methods for prices are
generally classified into the implicit or imputed
(indirect) methods explained in Section D (the differences
in terminology are notorious in this area)
and explicit (direct) methods explained in Section
E. Both decompose the price change between the
old product and its replacement into quality and
pure price changes. However, in the latter, an explicit
estimate is made of the quality difference,
usually on the basis of external information. The
pure price effect is identified as a remainder. For
implicit adjustments, a measurement technique is
used to compare the old product with the replacement,
so that the extent of the quality and pure
price change is implicitly determined by the assumptions
of the method. The accuracy of the
method relies on the veracity of the assumptions,
not the quality of the explicit estimate. In Sections
D and E, the following methods are considered detail:
• Implicit methods:
• Overlap;
• Overall mean/targeted mean imputation;
• Class mean imputation;
• Comparable replacement;
• Linked to show no price change; and
• Carry forward.
• Explicit methods:
• Expert judgment;
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