PPI and XMPI Compilation

1. PPI and XMPI Compilation Seminar on challenges in economic Statistics Tehran, Iran November 2008 Presentation by Carsten Boldsen Hansen, UNECE (carsten.hansen@unece.org)

2. Overview 1. The PPI family 2. PPI in an open market economy 3. Export and import price indices (XMPI) 4. International recommendations 5. Future challenges

3. 1. The PPI family Producer price indices Output PPIs Input PPIs PPI – Production for the domestic market PPI – Input from the domestic market PPI – Production for export PPI – Input from imports PPI – Total production PPI – Total input

4. 2. PPI in an open market economy Coverage of production and establishments: • The statistical unit for the PPI should be the “output generating entity”, the establishment, as outlined in the SNA • Traditionally, one would like the PPI to cover the production on the economic territory • Economic globalization makes the identification of the statistical unit and the scope of the PPI still more difficult in practice!

5. 2. PPI in an open market economy The situation today: • Most PPIs limited to the industrial sector, including manufacturing, mining and energy • Agriculture and services are excluded • Services - .i.e. transport, communication, medical care, trade, business services - grow in importance. • It becomes still more problematic to leave services out • Many countries are progressively developing PPIs for services • EU member countries are required to compile PPIs for the services producing industries. • The non-observed economy – often excluded but may be important

6. 2. PPI in an open market economy Challenges of economic globalization: • Outsourcing • Goods for processing • Merchanting • Virtual corporations • Multinational enterprises (MNEs) • E-commerce Makes the production of statistics, also the PPI, more difficult – and more challenging!

7. Country X Country Y Goods for processing Company A Company B Finished Goods Service included in Finished Goods Cash = value of service Country X Country Y Goods for processing Company A Company B Finished Goods Processing Service Cash = value of service 2. PPI in an open market economy Goods for processing – current treatment Goods for processing – new SNA/BOP convention

8. 2. PPI in an open market economy Merchanting An enterprise in country A buys goods in country B The goods never enter country A but are sold to country C The ownership moves from B to A and from A to C NA will look for values of flows according to change in ownership What will the PPI compilers do?

9. 2. PPI in an open market economy The challenges of globalization • The traditional coverage and relevance of PPI is questioned • How to decide which production activities to include - in principle - in practice • The treatment of “globalized” production may also depends on the different purposes of PPI • If such activities are included, how should they be price followed? • There are no easy or general answers to these questions

10. 2. PPI in an open market economy The prices: • For the PPI it should be the prices received by the producer, i.e. basic prices (SNA) excluding taxes plus subsidies • Input PPIs: The price actually paid by the purchaser, including taxes net of subsidies, i.e. purchasers‘ prices Transfer prices • Becomes more common as (international) trade is growing and posses serious measurement problems • Often they do not reflect real market prices. In such cases: • Use estimated or imputed prices, or • Exclude the transfer prices from the index

11. 2. PPI in an open market economy Some recommendations • Decide on the target of the PPI – what should in principle be covered, and ensure a clear delineation • Try in practice to be as close to the target as possible • The relationship and coherence with other statistics, notably the national accounts, should also be considered. • Cooperate with national accounts, and other areas: - may provide weighting data - may use PPI for deflation

12. 3. Import and export price indices Ten basic steps to develop XMPIs: 1. Defining the objective, scope and conceptual basis 2. Deciding on the coverage and classification 3. Deriving the weighting patterns of the indices 4. Designing the samples for the indices 5. Collecting and editing the prices 6. Adjusting for changes in quality 7. Calculating the indices 8. Disseminating the indices 9. Maintaining samples of reporters and commodities 10. Reviewing and reweighting the indices

13. 3. Import and export price indices 1) Defining objective, scope and conceptual basis of the index • Consult with stakeholders and users • Consider coherence with other data (national accounts and BOP) 2) Deciding on the coverage and classification structures of the indices • Examine data sources for weights and prices (trade statistics, customs data) • Decide on the actual coverage of goods and services. • Select classification

14. 3. Import and export price indices The most commonly used classifications are: • Harmonized System of Commodity Description and Coding (HS) • Standard International Trade Classification (SITC) • Central Commodity Classification (CPC]) • International Standard Industrial Classification of All Economic Activities (ISIC) • The European classification of economic activities (NACE)

15. 3. Import and export price indices 3) Deriving the weighting patterns of the indices • Select the level at which to form the elementary aggregates • A relatively high level of aggregation - e.g. 4-digit product or industry group – gives better discretion to select replacements, introduce new products and maintain the sample • Weights aims to be representative for the period in which they are used • Some normalizing or smoothing over more years may be appropriate to avoid irregular or extreme weights

16. 3. Import and export price indices 4) Designing the samples for the indices • Identify the sample frame - a listing of the population of units from which to select. Data sources for a frame include: - Customs data, - Statistical business registers, - trade organizations, - commercially maintained lists, - Registers (company registers, taxation records - Telephone directory “yellow pages,” • Select the establishments from the frame by - Purposive/judgmental sampling - Probability sampling • Take market conditions/concentration into account

17. 3. Import and export price indices 5) Collecting and editing the prices • Initialize collection from a company through a personal visit, by telephone, Internet, fax or mail contact, or some combination • Select the products to be price-followed - should be representative of the whole elementary aggregate • Decide on the time of price recording - point-in-time: a specific day - period-in-time: a period of days • Use specification pricing - require well-specified product descriptions - should include all price determining characteristics - when characteristics change, adjustment should be made • Follow actual market transaction prices • Conversion into domestic currency

18. 3. Import and export price indices 6) Adjusting for quality changes • Use well-specified & detailed product descriptions • Select products expected to remain on the market for some time • Apply quality adjustment when replacements take place 7) Calculating the index • Decide on index calculation formulas for elementary and higher-level indices • Unit value indices should be used only for strictly homogenous groups of products

19. 3. Import and export price indices 8) Disseminating the index • Disseminate long-term fixed base indices and 12-months rates of changes • Consult with user needs • Problems with confidentiality for detailed levels in XMPIs 9) Maintaining the sample of companies and products • Ensure procedures are in place to monitor and update the sample on a regular basis • Some sectors are more dynamic and needs more careful and regular monitoring • Weights within elementary indices needs also be updated

20. 3. Import and export price indices 10) Reviewing and reweighting the index • Decide on the frequency of re-weighting • Every 3 or 5 years may adequate under stable market conditions • The more dynamic markets, the greater need for frequent update of the weights • The greater variation in price changes, the greater need for frequent update of the weights

21. 5. Future Challenges for PPI and XMPI Exercise 3: Discuss the following questions and list your answers a) What will be the main challenges in the calculation of CPI and PPl in your country the next 5-10 years? b) What will be the likely obstacles – and can you propose any way in which to overcome these?

22. Producer Price Index Manual. Theory and Practice (2004). www.imf.org/external/np/sta/tegppi/index.htm Export and Import Price index Manual – forthcoming. Draft available on www.imf.org/external/np/sta/tegeipi/index.htm Methodology of short-term business statistics. Interpretation and guidelines. Available online from Eurostat’s webpage The Voorburg Group on Services Statistics. Webpage: http://www4.statcan.ca/english/voorburg/ Methodological Guide for Developing Producer Price Indices for Services. Eurostat, 2005. Available from Eurostat and OECD web Handbook on price and volume measures in national accounts. Available from Eurostat website 4. International recommendations

23. 5. Future Challenges for PPI and XMPI • Organisation of the statistical production process • Application of international comparable classifications (COICOP, NACE, ISIC, HS) • Index calculation methods • Integration of CPI, PPI and XMPI calculation, administrative and IT-systems? • Optimization of samples • Dissemination of data and metadata