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

Producer Price Index Manual
1.300 An output index can be constructed under
alternative classification structures. The most common
constructs are based on industry, commodity,
or stage of processing. International industry classifications
(for example, ISIC) and commodity classifications
(for example, CPC) are available for use in
index construction to ensure adherence to accepted
statistical standards and facilitate international
comparisons. Many countries or regions have developed
local adaptations of these classifications
that still conform to the underlying principles.
1.301 Formal classifications are hierarchical in
nature. For example, ISIC covers the entire economic
activity of an economy and provides for the
progressive aggregation of data from a fine level of
detail (for example, soft drink manufacturing),
through successively broader levels of aggregation
(for example, manufacturing of beverages; food,
beverage, and tobacco manufacturing; total manufacturing).
In designing an index classification
structure, it is important to consider issues such as:
• Publication goals. In particular, the level of detail
to be released, whether the indices will be
national only or include regional series, and the
needs of internal users;
• Potential bias in the index due to product replacement
and new goods. There are opportunities
to minimize such bias through grouping
products that are close substitutes.
1.302 Having determined the index classification
structure, the weighting pattern needs to be derived
and issues of sample design and price collection
addressed.
Step 3. Deriving the weighting pattern
1.303 A price index can be considered as being
built up from samples of prices of individual (or
price relatives) which are progressively weighted
together through successive levels of aggregation
within a classification framework.
1.304 In considering the development of an index
weighting pattern, two different categories of indices
need to be considered: lower level indices
(sometimes referred to as elementary aggregates)
and upper level indices.
1.305 The lower-level indices are built up by
combining together the individual prices using one
of a range of available price index formulas. At this
initial level of aggregation, the internal weighting
can be either explicit or implicit. If explicit weights
are used, then, as part of the price collection activity,
it is necessary to obtain relevant value data (for
example, product sales). This is discussed further
under Step 5 below. On the other hand, if implicit
weights are used, then the design features of the
sampling techniques employed to select the product
specifications for pricing need to result in the prices
being “self-weighted.” Such a result would be
achieved, for example, by using probability sampling
proportional to size.
1.306 Upper-level indices are formed through
weighting together lower level indices through progressive
levels of aggregation defined by the classification
structure, usually employing weights that
are fixed for a period (say one, three, or five years)
between index reweighting.
1.307 The selection of the level in the index hierarchy
at which the structure and weights are fixed
for a period is particularly important. The main advantage
of setting the level relatively high (for example,
at the four-digit industry or product group
level) is that the price statistician then has greater
discretion to update the lower-level price samples
(at the establishment and product level), their structure,
and their internal weighting on a needs basis
as market activity changes. New products and establishments
can be introduced easily into the samples,
and the weights at the lower level reestablished
on the basis of more recent market conditions.
That is, there is greater opportunity to keep
the index representative through an ongoing program
of sample review (see Step 9).
1.308 On the other hand, if the level is set relatively
low in the index structure, there is less freedom
to maintain the representativeness of the index
on an ongoing basis, and there will be a greater dependence
on the periodic index review and reweighting
process (see Step 10). In such circumstances,
the argument for frequent reweighting becomes
stronger.
1.309 Assume a manufacturing output index is to
be developed with the broad index structure based
on ISIC. In order to derive the upper-level weighting
pattern, a data source is required; potential
sources include industry surveys, economic censuses,
input-output tables, and international trade
statistics.
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