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

Producer Price Index Manual
sample maintenance activities described under Step
9.
1.339 Alternatives to the traditional mail questionnaire
include telephone, e-mail, Internet, telephone
data entry, fax, and the use of electronic data
transfer from company databases. Several national
statistical agencies have had experience with at
least some of these alternatives. Important factors to
be considered are data security, the convenience of
reporting for the business, cost, and effectiveness.
Step 6. Adjusting for changes in quality
1.340 The technique of specification pricing was
outlined under Step 5. The objective is to price to
constant quality in order to produce an index showing
pure price change. This is the most common
technique employed by national statistical agencies
in compiling PPIs.
1.341 To the extent that pricing is not to constant
quality, then, over time, the recorded prices can incorporate
a nonprice element. For example, if a
product improves in quality and its recorded price
does not change, there is an effective price fall because
an increased volume of product is being sold
for the same price. Conversely, if the quality of a
product declines without a recorded price change,
there is an effective price rise. In such circumstances,
the recorded price of the new product of
changed quality needs to be adjusted so that it is directly
comparable with that of the old product in the
previous period.
1.342 Failure to make such adjustments can result
in biased price indices and consequently biased
constant price, or volume, national accounts estimates.
1.343 It is possible to identify fairly readily the
main price-determining characteristics of many
goods (for example, a washing machine) that are
mass produced to fixed technical specifications and
can be readily described in terms of brand names,
model codes, etc. However, specification pricing
cannot be used for customized goods such as the
output of the construction industry. Nor can it be
used for much of the output of business service industries
(such as computing, accounting, and legal
services) because it is unique in nature (each transaction
is commonly tailored to the needs of an individual
client). Further, it is far more difficult to
identify all the price-determining characteristics of
many services because some are intangible.
1.344 In such cases, other approaches to pricing
to constant quality must be employed—for example,
model pricing—using narrowly defined unit
values or collecting charge-out rates (see Step 5).
1.345 Even in areas that do lend themselves to
specification pricing, problems arise when there are
changes to the specifications, and hence the quality,
of the products over time. Examples of possible
product changes would include:
• Presenting it in new packaging;
• Selling it in different size lots (for example, 1
kg packets of sugar replaced with 1.2 kg packets);
and
• Replacing it with a product with different technical
and design characteristics (for example, a
new model of motor vehicle).
1.346 The first step, in consultation with the provider,
is to fully identify the changes and assess
whether they are, in fact, quality changes.
1.347 The first example above (new packaging)
may be deemed to be cosmetic only; alternatively, it
could be assessed as being substantive if, for example,
it led to a reduction in the damage to the contents.
In the latter case, a value would need to be
placed on the improvement on the basis of some estimate
of the value of reduced damage.
1.348 The second example (change in size lot)
would be likely to involve an office adjustment
based on matching the new and old prices per a
common unit of measure (for example, price per
kilogram).
1.349 The third example (new model of motor
vehicle) is the most complex. Possible techniques
include using an assessment of the difference in the
production costs of the old and new models to adjust
the price of the new model. Alternatively, the
different product characteristics can be identified
and a value placed on them. The valuation can be
based on consultation with the producer or, if the
new model has features that were available as options
on the old one, market prices will exist for
those options. In cases where the old and new
model are sold (in reasonable volume) in parallel,
the difference in the overlapping transaction prices
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