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

Producer Price Index Manual
• Quantity adjustment;
• Differences in production/option costs; and
• Hedonic approach.
C.3 Some Points
C.3.1 Additive versus multiplicative
7.76 The quality adjustments to prices may be
undertaken by either adding a fixed amount or
multiplying by a ratio. For example, where m is the
old product and n its replacement for a comparison
over periods t, t + 1, t + 2, the use of the overlap
t+ 1 t+
1
method in period t + 1 required the ratio pn
/ pm
to be used as a measure of the relative quality difference
between the old item and its replacement.
This ratio could then be multiplied by the price of
p to obtain the quality-
the old item in period t,
adjusted prices
t
m
*t
pm
shown in Table 7.1.
Table 7.1. Estimating a Quality-Adjusted Price
t t + 1 t + 2
old item m t 1
replacement n *t
p
m
p +
m
t 1
p + t 2
n
p +
n
Such multiplicative formulations are generally advised
as the adjustment is invariant to the absolute
value of the price. It would be otherwise possible
for the absolute value of the change in specifications
to exceed the value of the product in some
earlier or—with technological advances—later period.
Yet for some products, the worth of the constituent
parts is not in proportion to their price. Instead,
they have their own intrinsic, absolute, additive
worth, which remains constant over time. Producers
selling over the Internet may, for example,
include postage, which in some instances may remain
the same irrespective of what is happening to
price. If postage is subsequently excluded from the
price, the fall in quality should be valued as a fixed
sum.
C.3.2 Base versus current period adjustment
7.77 Two variants of the approaches to quality
adjustment outlined in section C.2 are to either
make the adjustment to the price in the base period
or to make the adjustment to the price in the current
period. For example, in the overlap method
described above, the implicit quality-adjustment
coefficient was used to adjust p t m . An alternative
procedure would have been to multiply the ratio
p / p by the prices of the
t+ 1 t+
1
replacement
m
n
2
p +
t
product
n
to obtain the quality adjusted prices
* t 2
p +
n
etcetera The first approach is easier since
once the base period price has been adjusted, no
subsequent adjustments are required. Each new replacement
price can be compared with that of the
adjusted base period. For multiplicative adjustments,
the end result is the same whichever approach
is used. For additive adjustments, the results
differ. It is more appropriate to make the adjustment
to prices near the overlap period.
C.3.3 Long-run versus short-run
comparisons
7.78 Much of the analysis of quality adjustments
in this Manual has been undertaken by
comparing prices between two periods (for example
periods 0 and 1). For long-run comparisons,
suppose the base period is taken as period t and the
index is compiled by comparing prices in period t
first with t + 1, then with t + 2; then with t + 3. The
short-run framework allows long-run comparisons—say
between periods t and t + 3—to be built
as a sequence of links joined by successive multiplication—say
period t with t + 2 and period t + 2
with t + 3. This can also be done by chaining period
t with t + 1, t + 1 with t + 2, and t + 2 with
t+3. In Section H the advantages of the short-run
framework for imputations are outlined. In Section
G.3, chained indices are considered for industries
experiencing a rapid turnover in products. These
quality-adjustment methods are now examined in
turn, and in Section F, the choice of method is discussed.
C.3.4 Statistical metadata
7.79 In Sections D and E, implicit and explicit
methods of quality adjustments to prices are discussed.
In section F, the choice between these
methods is examined. Any consideration of the veracity
of these methods, resource implications, and
the choice between them needs to be informed by
appropriate information on an industry-by-industry
basis. Section C of Chapter 8 considers informa-
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