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

Producer Price Index Manual
these chapters, which are also summarized in Sections
B–E of this chapter, it is not repeated here.
1.268 At the time the monthly PPI is first calculated,
the only revenue weights available must inevitably
refer to some earlier period or periods. As
mentioned above, this predisposes the PPI to some
form of fixed-basket index (Laspeyres, Lowe, or
Young index, or chained Laspeyres index). However,
at some later date estimates must become
available of the revenues in the current period, so
that retrospectively it becomes possible to calculate
a Paasche-type index and superlative indices such
as Fisher or Törnqvist. 18 There is some interest in
calculating such indices later, if only to see how the
original indices compare with the superlative indices.
Some countries may wish to calculate retrospective
superlative indices for this reason. Thus,
although most of the discussion in Chapter 9 is
based on the assumption that some type of fixedbasket
index is being calculated, this should not be
interpreted as implying that this is the only possibility
in the long term.
P.3 Production and maintenance of
higher-level indices
1.269 In practice, the higher-level indices up to
and including the overall PPI are often calculated as
Young indices: that is, as weighted averages of the
elementary price indices using weights derived
from revenues in some earlier weight reference period.
This is a relatively straightforward operation,
and a numerical example is given in Table 9.5 of
Chapter 9, in which, for simplicity, the weight and
price reference periods are assumed to be the same.
Table 9.6 illustrates the case in which weight and
price reference periods are not the same and the
weights are price-updated between weight reference
period b and the price reference period 0. This
yields a Lowe index with quantities fixed for period
b. It illustrates the point that statistical offices have
two options when a new price reference period is
introduced: they can either preserve the relative
quantities of the weight reference period or they can
preserve the relative revenues. They cannot do both.
Price updating the revenue weights preserves the
quantities and produces a Lowe index. A Lowe in-
18 In fact, if a Laspeyres index is used and the revenue
shares do not change much through time, a geometric
Laspeyres index will approximate a Törnqvist index (Chapter
9, Section C.6).
dex with quantities fixed in period b might be preferred,
because of it has better axiomatic properties
compared with a Young index with revenue shares
from period b.
1.270 The weights in the PPI need to be updated
periodically or problems will result when a fixed set
of weights is used for a very long period of time.
For example, the prices of consumer durables, especially
when quality-adjusted, have been falling
relative to other goods, although the quantities purchased
and revenue share have increased. An outof-date
set of weights would give insufficient
weight to these falling prices. In the presence of
rapid changes in technology or tastes, the weights
need to be updated frequently and not allowed to
continue for too long.
1.271 Section C.7 of Chapter 9 notes that the introduction
of new weights is a necessary and integral
part of the compilation of a PPI over the long
run. Weights have to be updated sooner or later, and
some countries actually update their weights each
year. Whenever the weights are changed, the index
on the new weights has to be linked to the index on
the old weights so that the PPI inevitably becomes a
chain index over the long term. Chapter 9 also discusses
the techniques for linking series together by
developing a set of linking factors (coefficients)
that can be used for either forward linking or backward
linking. This involves calculating the higherlevel
indices on both the old and new weights during
an overlap period.
1.272 Apart from the technicalities of the linking
process, the introduction of new weights, especially
if carried out at intervals of five years or so, provides
an opportunity to undertake a major review of
the whole methodology. New products may be introduced
into the index, classifications may be revised
and updated, and even the index number formula
might be changed. Annual chaining facilitates
the introduction of new products and other changes
on a more regular basis, but in any case some ongoing
maintenance of the index is needed whether it is
annually chained or not.
P.4 Data editing
1.273 Chapter 9 concludes with Section D on
data editing. It is included in Chapter 9 because
data editing is a process that is closely linked to the
actual calculation of the elementary prices indices.
Data editing involves two steps: the detection of
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