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

Producer Price Index Manual
ample, the three largest businesses account for less
than 70 percent of the industry output, with the remaining
30 percent being produced by a large number
of small businesses, it may not be possible to
achieve adequate representation of price movements
by relying only on prices reported by the
three largest businesses. That is, it may not be reasonable
to assume that the pricing behavior of the
small businesses mirrors that of the large ones, because,
for example, they may target separate niche
markets and direct their pricing strategies accordingly.
Therefore, it would be prudent to select a
sample of the small businesses to represent the markets
the serve.
1.320 The less concentrated is the industry structure,
the stronger is the case for using probability
sampling techniques. Experience has shown that,
although many manufacturing and mining industries
may be dominated by a few large businesses,
many service industries have a very large number
of small businesses and, if there are any large businesses,
they produce a relatively small proportion
of the output. An added advantage of probability
sampling techniques is that they enable sampling
errors to be calculated, which provide some guide
to the accuracy of the resultant indices.
1.321 Procedures need to be implemented to ensure
that samples of businesses remain representative
through, for example, regularly augmenting the
sample by enrolling a selection of new businesses
as they enter the market. Also, a sample rotation
policy needs to be considered in order to spread the
business reporting load.
1.322 Once the sample of businesses has been selected,
they need to be contacted to agree on a sample
of representative product specifications for ongoing
price reporting. This is discussed further under
Step 5.
Step 5. Collecting and editing the
prices
1.323 The main source of ongoing price data is
usually a sample of businesses. The sample can relate
to either buyers or sellers, or a combination of
both. The choice will be influenced by the pricing
point of the index (input or output) and practical
considerations such as the relative degree of concentration
of buyers, and of sellers, and the implications
for sample sizes and costs.
1.324 The statistical units to be sampled may be
head offices reporting national data, establishments
reporting regional data, or a mixture. Decisions on
the units to be surveyed may be based largely on
pragmatic grounds such as efficiency of collection,
location of relevant business records, etc.
1.325 The aim of the price collection is to enable
the calculation of reliable indicators of period-toperiod—say,
monthly—price change. As such,
choices need to be made as to the type and frequency
of pricing. For example, point-in-time
prices may be the easiest to collect and process (for
example, transaction prices prevailing on a particular
day, say the 15th of the month) and commonly
prove to be reliable indicators. For workload management,
it may be decided to spread pricing over
the reference period with, say, three or four pricing
points and different commodities priced on different
days.
1.326 For commodities with volatile prices, it
may be necessary to price them on several different
days of the month and calculate time-weighted averages;
alternatively, businesses can be asked to
provide weighted average monthly prices (usually
derived by dividing the monthly value of product
sales by the quantity sold). This approach should be
avoided because it is susceptible to the unit value
“mix” problem, where products of different qualities
are included.
1.327 The most appropriate pricing methodology
to use is specification pricing, under which a manageable
sample of precisely specified products is
selected, in consultation with each reporting business,
for repeat pricing. In specifying the products,
it is particularly important that they are fully defined
in terms of all the characteristics that influence
their transaction prices. As such, all the relevant
technical characteristics need to be described
(for example, make, model, features) along with the
unit of sale, type of packaging, conditions of sale
(for example, delivered, payment within 30 days),
etc. This technique is known as pricing to constant
quality. When the quality or specifications change
over time, adjustments must be made to the reported
prices (see Step 7).
1.328 Another important consideration in establishing
and maintaining price collections is to ensure
that the prices reported are actual market
transaction prices. That is, they must reflect the net
prices received (or paid) inclusive of all discounts
54