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

9. PPI Calculation in Practice
A. Introduction
9.1 This chapter is to provides a general description
of the ways in which PPIs are calculated
in practice. The methods used in different countries
are not exactly the same, but they have much in
common. Both compilers and users of PPIs are interested
in knowing how most statistical offices actually
set about calculating their PPIs.
9.2 As a result of the greater insights into the
properties and behavior of price indices that have
been achieved in recent years, it is now recognized
that some traditional methods may not necessarily
be optimal from a conceptual and theoretical viewpoint.
Concerns have also been voiced in a number
of countries about possible biases that may be affecting
PPIs. These issues and concerns need to be
addressed in the Manual. Of course, the methods
used to compile PPIs are inevitably constrained by
the resources available, not merely for collecting
and processing prices but also the revenue data
needed for weighting purposes. In some countries,
the methods used may be severely constrained by a
lack of resources.
9.3 The calculation of PPIs usually proceeds in
two stages. First, price indices are estimated for the
elementary aggregates, and then these elementary
price indices are averaged to obtain higher-level indices
using the relative values of the revenue
weights for elementary aggregates as weights. Section
B starts by explaining how the elementary aggregates
are constructed and which economic and
statistical criteria need to be taken into consideration
in defining the aggregates. The index number
formulas most commonly used to calculate the elementary
indices are then presented and their properties
and behavior illustrated using numerical examples.
The pros and cons of the various formulas are
considered together with some alternative formulas
that might be used. The problems created by disappearing
and new products are also explained as are
the different ways of imputing for missing prices.
9.4 Section C of the chapter is concerned with
the calculation of higher-level indices. The focus is
on the ongoing production of a monthly price index
in which the elementary price indices are averaged,
or aggregated, to obtain higher-level indices. Price
updating of weights, chain linking, and reweighting
are discussed, with examples provided. The problems
associated with introduction of new elementary
price indices and new higher-level indices into
the PPI are also covered. The section explains how
it is possible to decompose the change in the overall
index into its component parts. Finally, the possibility
of using some alternative and rather more complex
index formulas is considered.
9.5 Section D concludes with data editing procedures,
since these are an integral part of the process
of compiling PPIs. It is essential to ensure that
the right data are entered into the various formulas.
There may be errors resulting from the inclusion of
incorrect data or from entering correct data inappropriately
and errors resulting from the exclusion
of correct data that are mistakenly believed to be
wrong. The section examines data editing procedures
that try to minimize both types of errors.
B. Calculation of Price Indices
for Elementary Aggregates
9.6 PPIs typically are calculated in two steps.
In the first step, the elementary price indices for the
elementary aggregates are calculated. In the second
step, higher-level indices are calculated by averaging
the elementary price indices. The elementary
aggregates and their price indices are the basic
building blocks of the PPI.
B.1 Composition of elementary aggregates
9.7 Elementary aggregates are constructed by
grouping individual goods and individual services
into relatively homogeneous products and transac-
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