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

Producer Price Index Manual
decisions to be taken about the degree of detail in
the published data and the alternative ways in
which the results may be presented. Users need to
be consulted about these questions. These issues are
discussed in Chapter 13. As they do not affect the
actual calculation of the index, they need not be
pursued further at this point.
Appendix 1.1: An Overview of
Steps Necessary for Developing a
PPI
1.282 This appendix provides a summary overview
of the various steps involved in designing a
PPI, deriving the index structure and weighting pattern,
designing the sample, establishing price collections,
calculating indices and disseminating the
results. It also outlines procedures for ensuring that
the price samples, index structure, and weighting
pattern remain representative. These issues are discussed
in more detail in subsequent chapters.
1.283 In following the steps described below, it is
important to be mindful of the practical experience
of national statistical agencies, which has led to the
identification of several important prerequisites for
the construction and compilation of an accurate
PPI. That is:
• The prices recorded in the index over time must
relate to:
(i) product specifications that are representative
indicators of price change;
(ii) constant quality products with fixed
specifications; and
(iii) actual market transactions inclusive of
all discounts, rebates, etc;
• The weights need to be representative of the
relevant pattern of transactions over the period
for which they are used for index aggregation;
and
• The aggregation formulas used must be appropriate
to the needs of the particular index and
not yield significant bias or drift.
Basic Steps in PPI Development
1.284 Ten basic steps can be defined for the design,
construction, dissemination and maintenance
of a producer price index. These steps are:
1. Determining the objectives, scope and conceptual
basis of the index;
2. Deciding on the index coverage and classification
structure;
• Deriving the weighting pattern;
• Designing the sample;
• Collecting and editing the prices;
• Adjusting for changes in quality;
• Calculating the index;
• Disseminating the indices;
• Maintaining samples of businesses and products;
and
• Reviewing and reweighting the index.
1.285 A summary of the issues involved with
each of these steps is provided in the rest of this appendix.
Step 1. Determining the objectives,
scope and conceptual basis of the index
1.286 Decisions made following close consultation
with users (both external users and internal national
statistical agency users such as national accounts)
about the objectives of the proposed PPI,
and hence its scope, have a fundamental influence
on the determination of the conceptual basis of the
index.
1.287 Uses range from economic policy (for example,
inflation analysis), to business applications
such as contract price escalation and monitoring of
relative performance, industry policy formulation,
and volume estimation (for example, national accounts
growth estimates). All key stakeholders need
to be consulted early in the index design stage to
ascertain what their needs are (that is, what are the
questions they are aiming to answer and, hence, are
the characteristics of the required statistics).
1.288 After the objectives have been determined,
informed decisions need to be made about the economic
scope of the index—that is, what is the domain
of price transactions that the index is aiming
to measure.
1.289 As discussed earlier and in Chapter 2, it is
necessary to determine whether the index is to be
demand based (an input index) or supply based (an
output index).
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