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

Producer Price Index Manual
limited economic life. Eventually, they disappear
from the market to be replaced by other products.
Because the universe of products is continually
evolving, the representative products selected initially
may gradually account for a progressively
smaller share of output and sales. As a whole, they
may become less and less representative. Since a
PPI is intended to represent all products, some way
has to be found to accommodate the changing universe
of products. In the case of producer durables
whose features and designs are continually being
modified, some models may have very short lives
indeed, being on the market for only a year or less
before being replaced by newer models.
1.205 At some point the continuity of the series
of price observations may have to be broken. It may
become necessary to compare the prices of some
products with the prices of other new ones that are
very similar, but not identical. Statistical offices
must then try to eliminate from the observed price
changes the estimated effects of the changes in the
characteristics of the products whose prices are
compared. In other words, they must try to adjust
the prices collected for any changes in the quality of
the products priced, as explained in more detail below.
In the limit, a completely new product may
appear that is so different from those existing previously
that quality adjustment is not feasible, and
its price cannot be directly compared with that of
any previous product. Similarly, a product may become
so unrepresentative or obsolete that it has to
be dropped from the index because it is no longer
worth trying to compare its price with those of any
of the products that have displaced it. Similar issues
of course arise for establishments, although the focus
here is on products.
L.2.5 Resampling
1.206 One strategy to deal with the changing universe
of products would be to resample, or reselect,
at regular intervals the complete set of products to
be priced. For example, with a monthly index, a
new set of products could be selected each January.
Each set of products would be priced until the following
January. Two sets have to be priced each
January in order to establish a link between each set
of 12 monthly changes. Resampling each year
set of goods and services is available in both the time periods
being compared.
would be consistent with a strategy of updating the
revenue weights each year.
1.207 Although resampling may be preferable to
maintaining an unchanged sample or selection, it is
not used much in practice. Systematically resampling
the entire set of products each year would be
difficult to manage and costly to implement. Moreover,
it does not provide a complete solution to the
problem of the changing universe of products because
it does not capture price changes that occur at
the moment of time when new products or new
qualities are first introduced. Many producers deliberately
use the time when products are first marketed
to make significant price changes. A more
practical way in which to keep the product sample
up to date is to rotate it gradually by dropping certain
products and introducing new ones. Products
may be dropped for two reasons:
• The product is believed by the respondent or
central office to be no longer representative. It
appears to account for a steadily diminishing
share of the total revenue within the product
group or industry in question.
• The product may simply disappear from the
market altogether. For example, among other
reasons, it may have become obsolete due to
changing technology, or unfashionable due to
changing tastes.
•
1.208 At the same time, new products or new
qualities of existing products appear on the market.
At some point, it becomes necessary to include
them in the list of products priced. This raises the
general question of the treatment of quality change
and the treatment of new products.
M. Adjusting Prices for Quality
Changes
1.209 The treatment of quality change is perhaps
the greatest challenge facing PPI compilers. It is a
recurring theme throughout the Manual. It presents
both conceptual and practical problems for compilers
of PPIs. The whole of Chapter 7 is devoted to
the treatment of quality change, and Chapter 8 addresses
the closely related topic of new goods and
product substitution.
1.210 When a sampled product is no longer produced
or is unrepresentive and is dropped from the
list of products priced in some establishment, the
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