Download Producer Prices, 1

Business Statistics and Registers
Producer prices, part 1
Introduction
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Concepts
• A Producer Price Index (PPI) provides a weighted average of the
price changes in a group of products between one time period and
another
• For an index to provide information on price changes, at least two
index numbers from the same series need to be available, and
these index numbers must relate to the same basket of goods
• There is no unique PPI, since the prices of different combinations of
goods and services do not all change at the same rate
• Because price changes can vary considerably from product to
product, the value of the price index will be dependent on the
precise set of goods and services selected
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Use of PPI
The PPI has the following main uses:
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• Indexation of contracts
• National accounts deflators
• Short-term indicator of
inflationary trends
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Indexation of contracts
• Indexation of contracts involves adjustment to
the value of monetary amounts based on the
increase or decrease in the level of a price index
to take the inflationary risk out of the contract
• Indexation n is common in long-term contracts,
e.g. in construction and aircraft production
• It is important that parties understand the exact
makeup of the index to ensure that it is suitable
for the purpose
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National accounts deflator
• A vital use of the PPIs is as a deflator of
production volumes in the national accounts
• For deflation of national accounts, currentweighted indices and fine aggregations are
required
• Paasche price indices would be ideal
• Many countries use chain-linked indices as an
alternative
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Basic price and producer price
The basic price is the amount receivable by the producer from the
purchaser for a unit of a good or service
• Basic prices are output minus any tax payable, and plus any subsidy
receivable, and exclude any transport charges invoiced separately
• The producer’s price is the amount receivable by the producer from
the purchaser for a unit of a good or service, minus any VAT or
similar deductible tax, invoiced to the purchaser, and excluding
transport charges
The difference between basic and producer prices is generally the per
unit subsidy that the producer receives and taxes on production
• Basic prices are preferred in the PPI
• In most cases basic and producer prices will be the same
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Short term inflation indicator
• Monthly or quarterly PPI with detailed
product and industry data allows short-term
price inflation to be monitored
• Models analyze price pressures that different
sectors of the economy are facing
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Inflationary pressures
Prices for the
PPI can be
measured at
two points:
- as inputs into
the production
process
- and as outputs
produced by the
production
process
Copyright 2010, The World Bank Group. All Rights Reserved.
Therefore,
the PPI can be
split into two
key groups:
- input prices
- and output
prices
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Output prices
• Output prices are the basic prices received by the
producer
• An output price index measures the average price
change of all covered goods and services resulting
from an activity
• PPI prices should be actual transaction prices, which
can be directly recorded
• The price should be recorded at the time when the
transaction occurs
• Intercompany transfer prices should be used with
caution
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Input prices
• Input price indices measure the change in the
prices of all intermediate inputs used in
production
• An input PPI measures changes in the cost of
the basket of purchases required as inputs
into the production process, excluding primary
inputs like land, labor, or capital
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Export/import prices
• Export and import prices are an important extension of
domestic PPIs
• They are used in the deflation of external trade
• Import prices feed into the producer input index, since
these are an important contribution to producer costs
• It is difficult to collect these price data from
establishments
• Price and quantity data on imports and exports are
therefore collected by other surveys
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Wholesale prices
• The Wholesale Prince Index (WPI) is the precursor of
the PPI
• The WPI was a measure of price changes one stage
prior to final demand
• The WPI differs from the PPI because it includes both
domestically produced products and imported
products (excluded from the PPI), while excluding
prices of exported products
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Taxes
• Taxes on products are generally excluded from
PPIs because these are usually deductible as
an expense by businesses
• Taxes such as excise duty on imports are
sometimes included
• Change in taxes may change prices
• It is possible to produce ex-tax/ex-duty indices
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Coverage
• Most PPIs measure price change for the goods producing
sectors of the domestic economy, includ. agriculture,
forestry, and fishing; mining; manufacturing; and public
utilities
• The construction sector has generally not been considered
a component of the traditional goods-based PPI
• The services sectors that are in scope for a PPI vary across
countries
• Many countries are interested in creating a corporate
services price index
• A more expansive definition could include all services
transactions that are in intermediate demand
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Price coverage
• The appropriate price to obtain from a theoretical
perspective should be the price at the time there is a
change in ownership
• It is difficult to adhere to this in practice
• Therefore, shipment price are often used
• In most circumstances the shipment price is final at
the time of delivery to the customer
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Net transaction prices
• Net transaction prices are actual shipment prices
received by the producer for the sales transaction
• The price includes the impact of all discounts,
surcharges, rebates, etc. for a unique customer or
unique class of customer
• Different types of prices meet the definition of the
net transaction price closely: particularly order prices
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Order prices
• Order prices refer to the price quoted at the
time the customer places an order
• There usually will not be any difference
between order and shipment prices
• For goods with an extended production
process other solutions must be used
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Role of weights
• The PPI is calculated from many prices collected from all
types of establishments
• The collected prices are first combined to compile indices
for each individual product
• Because some products have greater production or sales
than others, each product is given a weight to represent its
importance in total output or sales
• To arrive at the aggregate index figure, the price relatives of
the individual products are multiplied by these weights to
derive a weighted average aggregate index
• Weights are key elements in the construction of a PPI
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Value weights
• The best approach would be to have value of
production weights at basic prices for all levels of
index aggregation
• Since the PPI can also be used to measure the
change in intermediate input prices, the value
weights for the input index would be the cost of the
input products to the producer
• The value weight multiplied by the long-term price
relative provides the estimate of what it would cost
at today’s prices to produce the quantity of product
in the price reference period.
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Quantity weights
• The use of quantity weights is appropriate as long as
the same specific product was produced as in the
base period, that is, there is no qualitative difference
between the current product produced and the
base-period product
• Quantity weights are feasible only at the detailed
product level
• At higher levels of aggregation, such as at the
product group level or industry level, a value
aggregate is more appropriate
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Classification of goods
• The classification scheme of goods and
services in the PPI should follow the Central
Product Classification
• In terms of economic activities, the
establishments should be classified using ISIC,
Revision 4
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