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

11. Errors and Bias in the PPI
A. Introduction
11.1 A number of sources of error and bias
have been discussed in the preceding chapters and
will be discussed again in subsequent chapters.
The purpose of this chapter is to briefly summarize
such sources to provide a readily accessible overview.
Both conceptual and practical issues will be
covered. To be aware of the limitations of any PPI,
it is necessary to consider what data are required,
how they are to be collected, and how they are to
be used to obtain overall summary measures of
price changes. The production of PPIs is not a trivial
task, and any program of improvement must
match the estimated cost of a potential improvement
in accuracy against the likely gain. In some
instances, one may have to take into account the
user requirements necessary to meet specific needs
or engender more faith in the index, in spite of the
relatively limited gains in accuracy matched
against their cost.
11.2 Figure 11.1 outlines the potential sources
of error and bias in PPIs. The distinction between
errors and bias is, however, first considered in Section
B. In sampling, for example, the nature of the
sample design (example, the use of cutoff sampling–see
Chapter 5) may bias the sample toward
larger establishments whose average item price
changes are below the average of all establishments.
In contrast, an unrepresentative sample with
Figure 11.1. Outline of Sources of Error and Bias
Uses and Concepts
Coverage, valuation,
and sampling unit
Sampling error and
bias:
- sampling of
establishments
- sampling of products
Price measurement
- response error or bias
- missing establishments
- missing products
Substitution bias
- elementary level
- weighted level
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