Review of scope and purpose of the
producers price index
[Prepared October 2013]
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(If online only) Statistics New Zealand (2013). Title of publication in sentence case like
this and italic: Initial cap for first word of subtitle. Available from www.stats.govt.nz.
ISBN 978-0-478-40852-2 (online)
Published in October 2013 by
Statistics New Zealand
Tatauranga Aotearoa
Wellington, New Zealand
Contact
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Phone toll-free 0508 525 525
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To provide feedback, please contact Henry Minish using the contact details above.
Contents
List of tables and figures ................................................................................................... 4
Introduction to the PPI review ........................................................................................... 5
Summary about the PPI .................................................................................................. 5
History of New Zealand’s PPI .......................................................................................... 6
Scope of review ............................................................................................................... 6
Consultation process ....................................................................................................... 6
Structure of this paper ..................................................................................................... 7
Topics on which Statistics NZ seeks users’ views......................................................... 8
1 Purpose and uses of the PPI ........................................................................................ 8
2 Output and input industry indexes ................................................................................ 8
3 Weighting concepts ...................................................................................................... 9
4 Pricing basis for the PPI ............................................................................................. 11
5 Scope of transactions and transactors for the output PPI indexes ............................ 13
6 Specific issues for scope of transactions ................................................................... 14
7 Frequency ................................................................................................................... 19
8 Industry and commodity structure and detail ............................................................. 19
9 Index formula .............................................................................................................. 20
10 Stage of processing and stage of production indexes ............................................. 21
Appendix 1: Market output and non-market output ..................................................... 27
Market output ................................................................................................................. 27
Non-market output ......................................................................................................... 27
Appendix 2: National Accounts Supply Use Framework ............................................. 28
Appendix 3: Diagramatic example of commodity hierachy in New Zeland PPI ........ 30
Appendix 4: Index formula .............................................................................................. 32
Elementary aggregate indexes ...................................................................................... 32
Higher-level (industry) indexes ...................................................................................... 33
Current New Zealand PPI.............................................................................................. 33
International practice ..................................................................................................... 34
3
List of tables and figures
List of tables
1 PPI pricing basis example .......................................................................................... 12
2 Scope of PPI outputs index – under SNA gross output ............................................. 14
3 Summary of current situation and proposed position................................................. 23
4 Simplified national accounts supply and use table..................................................... 29
List of figures
1 Example of PPI outputs index calculation hierarchy .................................................. 30
2 Example of PPI inputs index calculation hierarchy .................................................... 31
4
Introduction to the PPI review
Summary about the PPI
What the PPI is
The producers price index (PPI) is a key economic indicator in most countries, including
New Zealand.
The PPI is designed to measure the average change in the price of goods and services,
either as they leave the place of production or as they enter the production process.
Accordingly, the PPI is constructed as either output indexes, measuring the average
change in the prices producers receive for their outputs; or input indexes, measuring the
average change in the prices producers pay for their inputs.
Why we’re reviewing the PPI
Statistics New Zealand has produced the PPI in essentially its current form for the past
35 years. Over this time there have been numerous re-weights and re-bases of the index
and we have adopted new industry classifications. The index has also adopted a ‘building
block’ approach, with lower-level commodity indexes feeding into higher-level industry
indexes, which provides greater flexibility for index maintenance. However, the underlying
conceptual basis and structure have remained the same.
As part of Statistics NZ’s goal of delivering accessible, relevant, and timely statistics for
all New Zealanders, an essential element is to ensure the statistics we produce are
serving needs of the user community. A formal review involving external user consultation
will ensure the needs of the user community are well understood and (ideally) met.
How the PPI is used
The PPI has uses that include: the deflation of gross flows for calculating volumes in the
national accounts, indexation of commercial contracts, and as short-term indicators of
producer inflationary trends. These diverse uses can have conflicting requirements in
terms of the types of indexes required, the weighting schemes used, the pricing level
required, the types of transactions included, and the range of expenditure covered.
The purpose of the PPI
This paper reviews the purpose of the PPI (and associated topics) and proposes that the
current purpose of the PPI be confirmed; that is, to measure producer output and input
inflation within a System of National Accounts (SNA) framework. This makes the PPI
suitable for a key use – the deflation of gross flows for calculating volumes in the national
accounts.
We recognise the PPI has other key uses, including the indexation of commercial
contracts and as a short-term indicator of producer inflationary trends. In applying the
SNA framework to the PPI, the challenge is to do so without limiting these alternative
uses of the indexes. Given the SNA framework, we can determine the types of indexes
required, the weighting schemes and pricing levels used, the types of transactions
included, and the range of expenditures to be covered.
As part of this review, Statistics NZ is seeking feedback on this proposal, and the
associated topics listed under ‘scope of review’ (below) and ‘topics on which Statistics NZ
seeks users’ views’.
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Review of scope and purpose of the producers price index
History of New Zealand’s PPI
In 1920 the Department of Statistics first published a forerunner to the PPI, the wholesale
price index (WPI). However, it was not until July 1978 that coverage of the index was
expanded and an effective PPI was published as the general price index. Following a
further development, the name was changed to the producers price index in August 1981.
Within two years, Statistics NZ began a rolling cycle of industry-based redevelopment.
The rolling industry-based redevelopments were discontinued in 1993. A decision was
made to redevelop the entire PPI between 1995 and 1998 as a one-off project.
We introduced a hierarchical ‘building-block’ structure for the PPI during the 1995–98
redevelopments. Under this structure prices feed into commodity indexes, which then
feed into working industry indexes, which then feed into industry indexes, and finally into
the all industries indexes. A further redevelopment that occurred between 2004 and 2010
focused on redeveloping the commodity indexes, and items to price within these
commodities. Funding was subsequently obtained to re-establish the rolling cycle of
redevelopments, which began in the 2011/12 financial year.
Scope of review
The main topics that Statistics NZ has identified for this review are:
• the purpose of the PPI
• output and input indexes
• weights and prices
• scope of transactions and transactors
• frequency
• commodity and industry detail
• index formula
• stage of processing/production indexes.
Consultation process
Statistics NZ is seeking the views of users.
You are invited to make submissions to Statistics NZ about the topics raised in this paper,
or any other topics considered relevant to the review. Please make your submissions to
Statistics NZ no later than 5:00 pm, 25 November 2013.
Statistics NZ staff also offer to meet users who want to discuss the topics.
Please email your submission to [email protected] or ring Henry Minish, Meighan Ragg,
or James Griffin (04 931 4600 or 0508 525 525).
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Review of scope and purpose of the producers price index
Structure of this paper
Subsections 1–10 in the next section cover the 10 topics on which we seek users’ views
about the PPI review of scope and purpose.
Each subsection contains a description of the current treatment of each topic and
whether changes are proposed.
A summary table of all the topics (table 3) follows subsection 10.
7
Topics on which Statistics NZ seeks users’ views
1 Purpose and uses of the PPI
Current
Primarily, the current PPI follows the national accounting concepts (System of National
Accounts (SNA)) that underlie the production account. The PPI measures the average
change in the price of goods and services, either as they leave the place of production, or
as they enter the production process. Accordingly, the PPI is constructed as either output
indexes, measuring the average change in the prices producers receive for their outputs;
or input indexes, measuring the average change in the prices producers pay for their
inputs.
The PPI has uses that include: the deflation of gross flows for calculating volumes in the
national accounts, indexation of commercial contracts, and as short-term indicators of
producer inflationary trends. These diverse uses can have conflicting requirements in
terms of the types of indexes required, the weighting schemes used, the pricing level
required, the types of transactions included, and the range of expenditure covered.
Proposed
We propose that the purpose of the PPI is confirmed – to measure producer output and
input inflation within an SNA framework. This makes the PPI suitable for a key use,
deflating gross flows for calculating volumes in the national accounts.
We recognise the PPI has other key uses, including indexing commercial contracts, and
as short-term indicators of producer inflationary trends. In applying the SNA framework to
the PPI, the challenge is to do so without limiting these alternative uses of the indexes.
The PPI is part of a coherent set of price indexes in the economics system, which also
includes the consumers price index (CPI) and the export and import indexes. The SNA
brings together the indexes in the economics system in a coherent way, and provides the
internationally recognised framework for measuring national economies, including price
inflation. Using the SNA framework supports a key use of the PPI – to deflate gross flows
for calculating volume estimates in the national accounts. By using this framework, the
types of indexes required, the weighting schemes and pricing levels used, the types of
transactions included, and the range of expenditures to be covered, can be determined.
2 Output and input industry indexes
Current
Statistics NZ compiles output and input indexes for the PPI.
The concept of output that underlies the outputs PPI currently produced by Statistics NZ
is similar to the SNA concept of gross output.1 We publish a comprehensive set of output
indexes that cover all the New Zealand Standard Industrial Output Categories (NZSIOC),
except public administration and safety (local government administration, and central
government admin, defence, and public safety), education and training, and health. The
1
The items priced in the output PPI cover gross sales, which is a major part of gross output. Gross
output consists of the goods or services produced within an establishment that become available for use
outside that establishment, plus any goods and services produced for own final use.
8
Review of scope and purpose of the producers price index
output industry PPI is used as a deflator of gross output for calculating volumes in the
Statistics NZ national accounts.
The concept of intermediate input, which underlies the inputs PPI produced by Statistics
NZ, is similar to the SNA concept of intermediate consumption.2 The input industry
indexes published have the same level of coverage as the outputs, except we also
publish input indexes for public administration and safety, education and training, and
health. Input indexes are used selectively in the Statistics NZ national accounts.
Therefore, in addition to using a raft of output price indexes, certain input price indexes
are used for the annual volume accounts. In the medium term, we are developing a
prototype for constant-price supply-use tables that requires using output and input
commodity indexes.
A common use of indexes in New Zealand, especially the input PPI, is in contract
indexation. Parties that engage in commercial contracts use a range of price indexes
produced by Statistics NZ in their indexation clauses (or contract escalation clauses). An
indexation clause provides both parties to a contract with an agreed procedure for
adjusting an originally contracted price, to reflect changes in costs or prices during the life
of the contract.
Proposed
The purpose of the PPI is to measure producer output and input inflation within the SNA
framework. Given this, we propose the New Zealand PPI should continue to be produced
as output indexes similar to the SNA concept of gross output, and input indexes similar to
the SNA concept of intermediate consumption.
Significant use is currently made of the output industry indexes in the quarterly national
accounts volume series. They are also used extensively in the annual series. A more limited
use is made of input indexes, in the annual national accounts volume series. A greater use of
input indexes will be required with the development of constant-price supply-use tables, a
prototype of which is under development. This will require input and output commodity
indexes.
3 Weighting concepts
Current
The New Zealand output industry PPI is produced using gross weights, which means the
values of all outputs within the same industrial classification category are in scope for
weighting and pricing. This ensures the indexes are complete in terms of covering the
targeted industries. Consequently, we prefer gross weighting for deflating industry gross
flows. This is done in the national accounts using NZSIOC level 4 PPI indexes. However,
when using gross weighted indexes, there can be a problem with multiple counting of
price change as products flow through the different production processes – this occurs
where the output of an enterprise is used as the input into another enterprise within the
same industry or sector of PPI aggregation. The double counting of price movements
makes the indexes less desirable for inflation monitoring.
2 The items priced in the input PPI cover goods and services and operating expenses used as inputs.
Intermediate consumption consists of the value of the goods and services consumed as inputs by a
process of production, excluding fixed assets whose consumption is recorded as consumption of fixed
capital; the goods or services may be either transformed or used up by the production process. Land,
labour, and capital are primary inputs and are not included in intermediate inputs.
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Review of scope and purpose of the producers price index
An alternative weighting method is to use net output weights, where only the value of
products sold to buyers outside the industry subdivision are included in the weight
calculations.
A good example of the difference between the two concepts occurs in the forestry and
logging industry. Assume there is a forestry firm that grows and sells standing timber, and
a firm that buys the standing timber, cuts it down, and sells the logs. An output industry
PPI based on gross output weights would include the sale of the standing timber and the
sale of the logs. However, an output PPI based on net output weights would only include
the sale of the logs, plus any sale of standing timber to firms outside the industry
concerned (ie the forestry and logging industry). The specific exclusion under the net
output weight structure is the sale of standing timber subsequently used to produce logs
in the industry.
The PPI Manual states:
It is desirable to produce aggregated PPI on a net sectoral basis. When using
gross sectoral indices, there is a problem with multiple counting of price change
as products flow through the different production processes—this occurs where
the output of one industry is used as an input into another industry within the
same sector of PPI aggregation. (PPI Manual 2004, para D2.45)
This implies the use of net output weights. However, the PPI Manual goes on to say
“Gross sectoral indices, however, also provide valuable information and are useful for
deflating the total turnover of industries, which by definition is on a gross basis.” It seems
the choice of output weights will depend on the primary purpose of the index.
Gross and net weighting have different applications. With the gross approach, because
all transactions are in scope for index weighting and pricing, including those between
production units classified to the same industrial classification category, the indexes are
complete in their coverage of the targeted industries. This is preferable for deflating
industry gross flows, which is done in the national accounts. Gross industry indexes
require one set of weights to construct the range of indexes for different levels of industry
aggregation. For example, a level 3 industry index can be derived by weighting together
separate level 4 indexes.
Conceptually, a net industry index avoids multiple counting of transaction prices as
products flow through production processes. This is the preferred approach for inflation
analysis as it best reflects the impact of inflation in the industry subdivision. However,
excluding internal intermediate transactions from the net industry indexes results in
incomplete coverage of the targeted industry. Also, net industry measures cannot be
aggregated. For example, a level 3 industry index cannot be derived by weighting
together the separate level 4 indexes. Multiple weighting patterns are required to
produce a range of independent net industry indexes – which net out inter-industry
transactions.
Proposed
Given that the purpose of the PPI is to measure producer output and input inflation within
the SNA framework we propose the output industry indexes be produced using gross
weighting, at least up to NZSIOC level 4 – the level at which national accounts deflation
takes place.
Statistics NZ is interested in users’ views on the appropriateness of continuing to
calculate gross weighted indexes above level 4 NZSIOC – given the increased likelihood
of transaction/price movement double-count at higher levels of aggregation. This is
especially about the relevance of publishing group indexes, such as the allmanufacturing-industries combined index and the all-industries combined index. We
currently publish the all industry output index as a headline measure for output prices.
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Review of scope and purpose of the producers price index
Concerns have been expressed in the past as to how movements in the all industries
output index can be interpreted, given it may include some price-movement double-count.
No research has previously been done into the level of price-movement double-count that
may be occurring with gross weighted indexes. With the availability of supply-use
information it should be possible to investigate the effect of compiling indexes on a net,
as well as a gross, basis – to analyse the difference that net weighting may make. Such
research would provide better information on the usefulness of the current gross indexes,
and whether there may be a need for net weighted indexes at higher levels of
aggregation – to better inform on inflationary trends.
We are interested in users’ views on what priority we should give to investigating this
issue.
For example, a net output index for all manufacturing industries would only include sales
to other industries and exports, which may be a useful aggregation. At the extreme, in
theory a net all-industries output index would include only exports. We already have
overseas trade indexes, albeit mainly calculated from unit values from New Zealand
Customs Service administrative data rather than surveyed prices.
International practice
The manufacturing industry PPI published by the Australian Bureau of Statistics (ABS)
used the net weighting approach until the June 2009 quarter. Following the ANZSIC06
implementation in the September 2009 quarter, the weighting bases were re-designed.
This moved the PPI weighting structure from a net to a gross industry approach, to
provide greater coherence with national accounts requirements. Following further
analysis and discussion with key users, the ABS determined there was a low potential for
distortion from multiple counting of changes in transaction prices. The ABS stated that an
advantage of the gross industry approach was the “improved coverage of transactions
primary to the targeted industry of the economy.” The bureau also produces an allmanufacturing-industries combined index on a gross weighted basis.
The United States, by contrast, publishes output industry indexes on a net weighting
basis.
4 Pricing basis for the PPI
Current
With the PPI, the process stage at which a price is collected is critical to its usefulness for
measuring producer output and input inflation.
In the New Zealand PPI, tax-free ‘basic prices’ collected directly from producers are used
to compile the output indexes. The basic price is the price the goods or service producer
actually received from the purchaser of that good or service, minus any tax payable and
plus any subsidy receivable on that unit as a result of its production or sale. These prices
may include subsidies, although subsidies are rare in the New Zealand context.
Prices used in the input indexes are a mix of output proxy prices (at basic or producer’s
prices) and a few directly collected input prices (at purchaser’s prices). Purchaser’s prices
exclude deductible taxes on products, such as GST, but include any non-deductible
product taxes (if they exist) and any trade margins or transportation charges. We use
output proxy prices under the assumption that the trade and transport margins represent
a constant proportion of the purchaser’s price over time, or that they are such a small
proportion of the purchaser’s price that changes in the margin proportions are unlikely to
have any substantial effect.
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Review of scope and purpose of the producers price index
There are practical difficulties in collecting purchaser’s prices from respondents.
Collecting these prices has a higher overall level of respondent load – for each
commodity used as both an input and an output, two prices need to be collected.
This is an important issue because both national accounts compilers, and inflation
analysts, assume that a comparison of corresponding input and output price indexes
provides signals about margin shifts. If output prices are inappropriately used to represent
input prices, then the indexes beg the question about margin performance. However,
variation in the margin charged by intermediaries is not the only possible source of
difference. The producer faces many other costs, such as labour and capital, and also
has to consider how much of any overall price change the market will bear in setting an
output price. These factors can have a significant effect on the output price, including
where it is used as an input further along the production process. Consequently, the
output price may be a reasonable representation of the input price the purchaser pays at
the next stage of production.
In addition, inputs may be directly purchased from one producer by another with no
intermediaries involved. Two significant examples are:
•
•
meat prices paid by meat processors to the sheep and beef cattle farming
industry being used as input prices into the meat and meat product manufacturing
industry
raw milk prices being paid to the dairy cattle farming industry by dairy
manufacturers being used as input prices into dairy product manufacturing.
Table 1 shows the relationship between basic, producer’s, and purchaser’s prices. In this
hypothetical example, a producer sells a single unit of goods to a purchaser for NZ$100,
which includes a transport charge of NZ$10. There are no explicit taxes on production;
however, the producer receives a government subsidy of NZ$15 for each unit of output
produced. Thus the producer’s price is NZ$90 (and a separate output of transport
services supplied at NZ$10), while the basic price is NZ$105 (ie NZ$90 + NZ$15). The
purchaser would report the price as the NZ$100 they paid.
Table 1
PPI pricing basis example
1 PPI prici ng basis exampl e
NZ$
Basic price
105
+ taxes on products
- subsidies on product
0
(15)
= Producer’s price
90
+ transport and trade margins paid by purchaser
10
= Purchaser’s price
100
Ideal output price
Ideal input price
Proposed
We propose that the pricing level adopted for output and input indexes meet SNA
requirements, where possible. Therefore, PPI output indexes will use basic prices and
PPI input indexes will use purchaser’s prices. This approach is also preferable for uses
such as inflation monitoring and contract indexation.
National accounts staff are developing a prototype for constant-price supply-use tables.
The recommended pricing level for this development is basic prices for the supply table
and purchaser’s prices for the use table.
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Review of scope and purpose of the producers price index
Statistics NZ undertakes rolling reviews of the PPI weights and prices, by industry, and
also updates lower-level commodity index weights and prices as required. Within these
reviews, we will closely scrutinise the pricing level used in outputs and inputs, carefully
targeting areas where pricing level is an issue, particularly for purchaser’s prices on the
inputs side. Also, our sources and methods information will be more transparent in terms
of where the preferred pricing levels are or are not being used. Usually the output price
(basic price) will be a reasonable representation of the purchaser’s price, where goods
are used in a further stage of production, especially where producers deal directly with
one another and no intermediaries are involved.
For the input industry indexes, one option being considered is to create a separate
commodity for transport margins, which would include directly surveyed prices for
transport costs relevant to a commodity area; for example, livestock transport.
Respondent load is another issue to consider. Statistics NZ is committed to
demonstrating best practice for managing respondent load across the Official Statistics
System. Any increase in collecting additional purchaser’s prices may need to be balanced
by savings in other areas – ideally, there is no net increase in the number of prices
surveyed. For example, we review price collection to eliminate prices that are no longer
required as part of our ongoing rolling review of weights and prices.
5 Scope of transactions and transactors for the output
PPI indexes
Current
Broadly speaking the output PPI seeks to measure changes in the prices of goods and
services that make up gross output, 3 as defined by the SNA.
The PPI output indexes generally cover all market output of producers; that is, output sold
at prices that are economically significant, or otherwise disposed of in the market, or
intended for sale or disposal in the market. One exception is private health and education
services, which are relatively small components within the government-dominated
industries of health and education and are excluded from the scope of the current output
PPI.
The PPI also includes output for own final use, in the form of the notional output of the
owner-occupied housing, which is a separately published industry. Output for own final
use consists of goods or services produced by an establishment and used for its own
gross fixed capital formation. Other non-market activity is excluded. This consists of
goods and individual or collective services, provided by non-profit institutions serving
households (NPISHs) or government, that are provided free, or at prices that are not
economically significant, to other institutional units or the community.
The PPI Manual supports the view that PPI will include all market output and would also
in theory cover output produced for own final use. In practice, output produced for own
final use may be difficult to obtain meaningful prices for.
Table 2 illustrates the coverage of transactions, with the shaded areas representing
theoretical scope of a PPI outputs index under SNA concepts. Note that for the market
output of non-market units and for output for own final use, the decision whether to
include these categories of output in scope or not would depend upon their nature and
significance. More information on the definition of market, and non-market output is
3 The items priced in the output PPI cover gross sales, which is a major part of gross output. Gross
output consists of the goods or services produced within an establishment that become available for use
outside that establishment, plus any goods and services produced for own final use.
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Review of scope and purpose of the producers price index
included in appendix 1. Information on how the indexes fit into the system of national
accounts is included in appendix 2.
Table 2
Scope of PPI outputs index – under SNA gross output
2 Scope of PPI outputs index – under SN A gross output
Type of producer
Type of output
Market
Non-market
Market output
Included
Only include if ongoing
and significant
Output for own final use
Only include if ongoing
and significant
Only include if ongoing
and significant
Other non-market output
Excluded
Excluded
Proposed
Given the purpose of the PPI is to measure producer price inflation within the framework
established by the SNA, this also defines the scope of transactions in the PPI. This
includes:
•
•
all market transactions and market prices sourced from market producers 4
the ownership of owner-occupied dwellings under output for own final use, to
ensure coherence with the SNA.
6 Specific issues for scope of transactions
6.1 Ownership of owner-occupied dwellings
Current
The notional output of owner-occupied dwellings is a separately published industry in the
PPI and represents approximately 5 percent of the all industries (outputs) PPI. Prices for
this industry are proxied by CPI market rental prices.
The production of housing services for their own final consumption by owner occupiers
has always been included within the production boundary in national accounts. The ratio
of owner-occupied to rented dwellings can vary significantly between countries, between
regions of a country, and even over short periods within a single country or region. As a
result, both international and time comparisons of the production and consumption of
housing services could be distorted if no imputation is made for the value of own-account
housing services.
4 Market transactions in the private health and education service sectors will continue to be excluded
from coverage of the output indexes, because of their relatively small size compared with the nonmarket components in these industries.
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Review of scope and purpose of the producers price index
Proposed
The ownership of owner-occupied dwellings (OOD) is included under output for own final
use and so, in theory, is in scope of the output PPI. This ensures coherence with the SNA
coverage.
In considering the PPI as an inflation measure rather than a national accounts deflator,
the PPI Manual recommends that notional transactions such as imputed dwelling rents
should not be included in the published PPI. The manual comments that most countries
exclude the ‘notional’ output OOD from the scope of published PPIs. However, including
OOD in the PPI only becomes an issue if this is published as part of an aggregation that
includes other industries, or as part of the all industries PPI – which is currently the case.
To better meet the needs of inflation measurement we propose that an all-market
industries PPI (excluding ODD) should be published, as well as the current all industries
PPI5 – for both outputs and inputs. OOD is also published as part of the industry group
rental, hiring, and real estate services, so we would need additional indexes for this group
excluding OOD.
6.2 Treatment of financial intermediation services indirectly
measured
Current
As with other commodities, charges for banking services have a price and volume
element. Values for these services are measured in two ways. Firstly they can be
charged for explicitly through a commission or fee. For example, a bank’s charge for a
specific type of transaction (eg a cheque clearance fee or a foreign exchange
commission). The second way is through financial intermediaries earning higher amounts
of interest on loans than they pay on deposits. This means of charging can be described
as the interest margin, which is referred to as financial intermediation services indirectly
measured (FISIM) in the national accounts.
Currently the bank service charge (a margin concept similar to FISIM) is included in the
output PPI index of the finance industry (banking and financing), which matched the
national accounts treatment (SNA68) of this component until recently – the whole of the
output was recorded as the intermediate consumption of a nominal industry.
Statistics NZ recently changed the way FISIM is included in the national accounts, to be
consistent with the SNA08 treatment (and the previous SNA93). Under the latest
treatment, by identifying the service value (FISIM) within a given interest transaction, we
can allocate the value to the customer receiving or paying the interest. This also enables
the service values to be allocated to institutional sectors and industries. Including this
latest change for FISIM in the PPI to conform with the SNA would mean incorporating a
FISIM component in each industry input index. The FISIM component would be small in
many industries but quite significant in some – such as the agricultural input industries.
Another school of thought suggests the basis for a PPI should be viewed more on
accounting lines than on economic ones. In this view, the banks’ output would necessarily
be viewed as the gross interest income they receive, and this would be similarly
represented by the consumption (both final and intermediate) of gross interest payments
by non-banking sectors. One consequence of this (accounting) view is that the financial
intermediation sector’s output within the PPI would be higher than in the (economic)
national accounting view. This would introduce inconsistencies in the relative weights of
5 This presumes that all industry PPI will continue to be published. The relevance of publishing an all
industry PPI is discussed under section 3, Weighting concepts, given concerns over the possible doublecount of price movements from using gross weighting.
15
Review of scope and purpose of the producers price index
the financial intermediaries sector within the PPI all-industries aggregate when compared
with the national accounts. Potentially this could be quite confusing to users.
Proposed
Given the purpose of the PPI is to measure producer price inflation within the SNA
framework, we propose FISIM be included on a margin basis as this ensures coherence
with the SNA treatment.
Here is an instance of a market producer (ie the bank) producing a service for which
there is a readily observable market price (ie the interest rate 6). The question ‘what do we
want the PPI to show?’ has no simple answer. If we want to produce a suite of PPI
indexes that are completely integrated with the SNA measurement of the national
economy, then the answer is to seek to adhere to this framework, where feasible and
practical. This would mean measuring the banking sector’s output as we currently do (ie
on a margin basis), and allocating the use to the final and intermediate demand
categories – based on an agreed allocation methodology that would be transparent to
users.
In principle, including FISIM in the PPI should also be updated to correspond to the mostrecent SNA version. However, in the short term the national accounts will not be using
the PPI that includes FISIM to deflate intermediate consumption for the annual volume
accounts. This is because of the way FISIM is currently incorporated in constant-price
terms. National accounts will still require PPI deflators that exclude FISIM to deflate the
non-FISIM part of intermediate consumption. In the longer term, we aim to use one PPI
for each annual industry to deflate intermediate consumption; ideally, this deflator would
include FISIM where applicable. In practice, updating the treatment of FISIM in the PPI to
the latest SNA version could wait until there is a need for input deflators that include
FISIM in the national accounts. At that time, the national accounts and price index work
areas could agree on the appropriate pricing methodologies.
Statistics NZ is interested in users’ views on delaying the updating of FISIM in the PPI
until the national accounts needs deflators that include this component.
We do not propose including gross interest rates in the PPI; this approach is not
supported by any internationally recognised framework for price measurement.
6.3 Treatment of insurance services
Current
The approach for insurance is essentially the same as that for FISIM. An exception is that
the measurement convention within national accounts is to take a long-term view of the
premiums/claims ratio – to account for the sporadic nature of insurance claims.
The national accounts approach to measuring insurance based on SNA08 is as follows:
Total premiums earned
plus premium supplements
less adjusted claims incurred.
In the current PPI, the insurance weight, for both the output index (insurance industry)
and a range of input indexes, is premiums net of claims. This treatment is consistent with
the SNA. For the pricing, gross premiums are surveyed for a certain level of cover.
6 Or to be more accurate, that portion of the interest rate margin applied to a fixed-quality volume of
financial intermediation services.
16
Review of scope and purpose of the producers price index
Proposed
We propose that the PPI treatment for insurance should continue to be consistent with
the SNA, with the weight being premiums net of claims – the current treatment.
There is no internationally agreed pricing method for insurance in PPI. The current
method, where gross premiums are surveyed for a certain level of cover, is done for
practical reasons and is the common method used internationally.
6.4 Distribution industries – retail and wholesale trade
Current
The distribution industries include the wholesale trade and retail trade industries. Their
output is providing a distribution service. The margin (rather than the profit) is how this
service is charged. This is because wholesalers and retailers essentially buy goods from
one agent in the economy and sell the goods to a different agent. They do not materially
transform the goods they buy and sell through any kind of production process. Therefore
their activities are not seen as output, except in the sense that their profits form a part of
value added. Value added for the distribution industries is the margin on sales of goods
(gross output) less their intermediate consumption. Purchases for resale are not included
in intermediate consumption but are deducted from sales in gross output. This is because
the goods sold are not used up in production.
The PPI Manual recommends pricing retail and wholesale margins directly, to represent
changes in the price of the output of retail and wholesale industries. In New Zealand’s
PPI the selling prices of commodities are used as proxies for margins in the output PPI
indexes, for the distribution industries, instead of collecting margin prices directly. This
treatment assumes that margins represent a constant proportion of the sellers’ price over
time. Therefore when the price of the goods sold by the distribution industry rises, we are
implicitly assuming the price of the distribution service rises by the same percentage.
Margins have not been directly price surveyed in the PPI because of the practical
difficulties in doing this.
This treatment currently aligns with the way constant-price output is calculated for the
retail and wholesale industries in the national accounts. A true margins deflator is not
required for national accounts as margins are not deflated directly. To calculate the
constant-price output of a retailer (and wholesaler) in the national accounts, the gross
margin is multiplied by the deflated values of sales – which requires a deflator of gross
sales.
Proposed
We propose that selling prices of commodities continue to be used as proxies for margins
in the output PPI indexes for the distribution industries; we should not attempt to price
margins directly. This aligns with the method used to calculate constant-price output for
these industries in the national accounts, where gross sales are deflated and margins are
not deflated directly.
The Australian Bureau of Statistics (ABS) has spent several years trying to develop a
method to price actual sales margins, as described in the PPI Manual, but has not yet
implemented a practical working model.
6.5 Extending the scope of the PPI to cover more than national
accounts gross output and intermediate consumption
Current
On occasions it has been suggested that we should extend the scope of the PPI beyond
the current SNA coverage. This is particularly on the inputs side where coverage relates
to the SNA concept of intermediate consumption. Interest charges and local authority
17
Review of scope and purpose of the producers price index
rates are examples of expenses that have been suggested for inclusion in the input
indexes.
Proposed
The purpose of the PPI is to measure producer output and input inflation within the SNA
framework. Given this, we propose the scope of the PPI should not be expanded beyond
the national accounts concepts of gross output (output indexes) and intermediate
consumption (input indexes).
The farm expenses price index (FEPI) published by Statistics NZ includes categories of
expenditure not included in the PPI, such as interest costs, wages and salaries, and local
authority rates. These indexes, which are now being reviewed, were previously reviewed
in 1992. Given there is no framework for determining the weighting and pricing
methodologies for some of the additional items included in FEPI, we sought users’ views
on how to treat, for example interest costs. We received conflicting user views on how
some of these costs should be treated and had to balance them in deciding on a
methodology.
Whether these items of ‘expenditure’ should ideally be included in a PPI depends on how
the purpose of a PPI is viewed. If a PPI is seen as an inflationary indicator that can be
reconciled with the underlying national economic measurement framework (ie the SNA),
then these transactions do not fall legitimately in scope of a PPI. The statistical
aggregates published by a national statistical office (NSO) should be able to be
presented within a single, unifying framework. The national accounts provide such an
internationally accepted framework; we need to take care before we consider departing
from this. While user demand will always be an important part of determining what should
be produced by a NSO, considerations outside this include international and internal
comparability.
In addition to the PPI, Statistics NZ also produces the labour cost index (LCI – all labour
costs) and the capital goods price index (CGPI – capital purchases). These indexes are
consistent with the components of compensation of employees and gross fixed capital
formation, respectively, in the national accounts. A weighted combination of the PPI and
LCI is often used to represent intermediate and labour input costs in contract indexation
clauses. Using combined indexes is an approach taken in some New Zealand standards
for contract indexation. Parties to contracts choose the appropriate weightings for index
components, depending on the make-up of costs on the project.
The standards for building and construction (NZS 3910:2003) and for contract conditions
for building and civil engineering construction (NZS 3915:2005) provide an appendix that
covers cost fluctuation adjustment by indexation. For example NZS 3910:2003 has a
formula to adjust for cost increases during a building project – based on a weighted
combination of the PPI inputs: industry group – construction; and the LCI private sector:
industry group – construction: all salary and wage rates.
Although Statistics NZ could provide combined measures weighted together on an
average basis, the weighting proportions used may not be applicable to an individual
user’s requirements.
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Review of scope and purpose of the producers price index
7 Frequency
Current
In the IMF’s General Data Dissemination Standards (GDDS), 7,8 PPIs are a recommended
output for national statistical offices. The GDDS encourages a PPI to be compiled and
disseminated with the same periodicity and timeliness as a CPI. Statistics NZ currently
produces the CPI and PPI quarterly.
Proposed
We propose the PPI should continue to be published on a quarterly frequency. Should
the CPI change to a monthly frequency in the future, this would not necessarily mean the
frequency of the PPI had to change. A major use of the PPI is as deflators in the national
accounts (GDP), which are also published quarterly. Virtually all other economic outputs
produced by Statistics NZ are published on a quarterly basis.
8 Industry and commodity structure and detail
Current
The New Zealand PPI is constructed as a series of hierarchical indexes, working down
from the all industries index to the lowest level of industry detail (NZSIOC Level 4 for
calculation). NZSIOC is based on the Australian and New Zealand Standard Industrial
Classification (ANZSIC06), which is in turn aligned with the International Standard
Industrial Classification (ISIC).
Underlying this industry hierarchy are ‘building block’ commodity indexes. At the mostdetailed level, are the ‘representative commodity’ indexes. These are the lower-level
indexes that feed up into the higher-level commodity indexes, which correspond with the
commodity classification used by national accounts (NA06CC) within their supply and use
balancing system. NA06CC is a single-level 5-digit classification with 297 categories; it
concords to the international commodity classification, Central Product Classification
(CPC).
Representative commodity indexes are compiled separately for domestic sales (outputs)
and purchases (inputs), exports (outputs), and imports (inputs). This is done to separately
identify export and import prices, which should only be used in output and input indexes,
respectively. This has the benefit of allowing separate analysis of the effect of import
prices on industry input prices. The same applies to export prices in the output indexes.
Taking this approach aids analysis of price movements in the aggregate data, and
provides context for information releases. Such additional detail is also useful in
compiling constant-price supply-use tables.
7
The GDDS fosters sound statistical practices with respect to both compiling and disseminating
economic, financial, and socio-demographic statistics. It identifies datasets that are of particular
relevance for economic analysis and for monitoring social and demographic developments, and sets out
objectives and recommendations relating to developing, compiling, and disseminating statistics.
Particular attention is paid to the needs of users, which are addressed through guidelines relating to the
quality and integrity of the data, and access by the public to the data.
8
The General Data Dissemination System: Guide for Participants and Users
19
Review of scope and purpose of the producers price index
Capital goods price index
The capital goods price index (CGPI) estimates the overall price change in physical
assets that the productive sector holds, acquires, or builds. The major asset groups are
buildings, residential, and non-residential; civil construction; land improvements; transport
equipment; and plant, machinery, and equipment.
There are some fundamental differences between the CGPI and the PPI. The CGPI is
primarily a product-based index, whereas the PPI is both an industry-based and a
product-based index.
The scope of the CGPI also differs from the PPI. The CGPI measures changes in prices
for fixed assets rather than products used up by the productive sector in an accounting
year. The input PPI indexes cover goods and services used by the productive sector.
The CGPI is a price index that is conceptually related to gross fixed capital formation in
the SNA. However, it only measures prices for purchases of new fixed assets and not
existing ones.
Many of the asset types included in the CGPI are sourced mainly from overseas
(imports), so it may be useful if these were separately identified – as for the PPI
representative commodity indexes. This would allow the price effects of imported assets
to be identified separately.
Proposed
We propose to continue producing the PPI using the industry (NZSIOC) and commodity
(NA06CC) classifications used in the national accounts and other economic statistics
Statistics NZ produces.
We also propose to continue the building block approach for compiling the PPI; this
provides coherence with the national accounts supply-use tables and also gives us a
flexible approach for maintaining the relevance of the indexes.
Being able to separately identify exported and imported commodities in the PPI
representative commodity indexes is useful for understanding the price effects of exports,
for output prices, and imports for input prices. It also provides context for information
releases. It may be useful to extend this approach to the parts of the CGPI that have
significant expenditure on imports.
For commodity indexes, we currently publish only 21 selected commodity indexes.
NA06CC calculates a significantly larger number of commodity indexes. Our view is that
we could publish more of these series, provided they are of fit-for-purpose quality and
confidentiality requirements are met. This still requires further investigation.
9 Index formula
Current
The Laspeyres is the most-commonly used index formula, both in New Zealand and
internationally. The PPI is compiled using a variation of this base-weighted formula.
The weighted price relatives form of the Laspeyres is used at all levels of the index
calculation, from lower-level aggregates to higher-level industry indexes. Where no
information is available to weight priced items within lower-level aggregates the items are
equally weighted.
A base-weighted Laspeyres price index measures the changing cost over time of a fixed
basket of goods and services. A PPI outputs index measures the revenue from selling,
20
Review of scope and purpose of the producers price index
while a PPI inputs index measures the cost of purchasing, such a basket of goods. The
use of this formula assumes, through fixed base weights, inelastic demand. That is, there
are no quantity changes or substitution of products in response to relative price changes
or changes in taste and fashion. This generally means the Laspeyres formula tends to
overstate price change where there is substitution towards products with relatively lower
price movements.
This tendency is mitigated to a large extent in the PPI through annual updates to the
weights. We have updated the industry (NZSIOC level 4) and commodity (NA06CC)
weights annually since implementing the Australian and New Zealand Standard Industrial
Classification 2006 (ANZSIC06) in the March 2011 quarter. The weights are sourced from
the supply-use tables (SUT) produced annually as part of the national accounts. The
weights associated with the commodities, and the weights attached to each industry, are
therefore annually chain-linked. This reflects changes in economy-wide income and
expenditure in the mix of products and the mix of industries.
The weighting information used for the annual reweights applies to a previous period. For
example, the new weights introduced in the March 2013 quarter were generally sourced
from the 2009/10 SUT. These weights were applied to a new price reference period
(December 2012 quarter) and are used to weight price movements from the December
2012 quarter to the March, June, September, and December 2013 quarters.
Proposed
We propose that the weighted price relatives form of the Laspeyres continues to be the
principal formula used to calculate lower-level aggregates and higher-level indexes in the
PPI.
The PPI Manual favours using the Jevons formula to calculate elementary aggregates; it
is an unweighted version of the geometric Laspeyres index. The Jevons formula also
allows some substitution where consumers switch from products with higher price
movements to those with lower relative price movements. The Jevons formula is used in
New Zealand’s CPI for categories of goods where substitution occurs.
There is a question as to how applicable this substitution property is in the PPI context. It
would appear to be less appropriate for PPI, particularly output indexes, where producers
interested in profit maximisation may tend to substitute towards products with higher price
rises. While this may be the case for individual producers, purchasers of inputs would
also be substituting towards goods with relatively lower price movements. In aggregate,
producers would need to continue to react to signals from purchasers to ensure their
goods were price competitive. The Jevons formula may have application within the PPI –
to calculate lower-level aggregates where substitution occurs.
Given this possibility, Statistics NZ proposes applying the Jevons formula where there is
a clear case to do so.
We would like users’ views on using the Jevons formula for calculating lower-level
aggregate indexes. Using the Jevons formula could be targeted at areas where goods
are truly substitutable. Where there is little or no substitution within lower-level aggregate
indexes, the Laspeyres formula should continue to be used.
10 Stage of processing and stage of production
indexes
Current
Beyond their use as inflationary indicators or as deflators, certain PPI frameworks may
provide insight into the linkages between price movements at different stages of
21
Review of scope and purpose of the producers price index
production. Alternative frameworks are ‘stage of processing’ or ‘stage of production’
indexes.
A stage of processing index classifies goods or services according to their position in the
chain of production – that is, primary products, intermediate goods, and finished goods.
This framework allows analysts to track price inflation through the economy – for
example, price changes in the primary stage could feed through into later stages, so we
get an indicator of future inflation further down the production chain. A product is
allocated to only one stage, even though it may occur in several stages.
A stage of production index allocates goods or services according to the stage in which it
is used. This differs from stage of processing because a product is included in each stage
to which it contributes, not just one stage. Products are classified to the different stages
through reference to input-output tables and, to avoid multiple counting, the stages are
not aggregated.
The United States publishes stage of processing indexes as their headline PPI measure.
The indexes are broken into three stages: crude materials for further processing;
intermediate materials, supplies, and components; and finished goods.
Australia currently produces stage of production indexes as their headline measure for
the PPI, and a range of industry indexes.
Under the stage of production framework used in Australia, flows of products are
categorised according to their economic destination along the production chain. In simple
terms, transactions (flows of products) are placed in one of three stages:
• preliminary demand – products consumed as inputs into producing intermediate
demand.
• intermediate demand – products consumed as inputs into producing final demand.
• final demand – products consumed as final demand, with no further processing.
Proposed
We would like users’ views about the usefulness of the stage of processing or stage of
production indexes for monitoring producer inflation.
In the New Zealand context, these frameworks would provide alternative summary
measures to the all industries indexes currently produced. In countries that produce them,
the price movement is published for each stage – although the different stages cannot be
combined. They are used as summary headline PPI measures in the United States and
Australia.
To develop such frameworks would not be a trivial task. The ABS estimated it took at
least three person-years of effort to develop their stage of production indexes.
22
Review of scope and purpose of the producers price index
Table 3
Summary of current situation and proposed position
3 Summar y ofof c urrent situati on and propos ed posi tion
Topic
Purpose
Output and input indexes
Weighting concepts – output
indexes
Current
Proposed
•
Concept of output that underlies output PPI indexes is
similar to SNA concept of gross output – PPI outputs
only cover sales
•
Concept of intermediate input used in input PPI is
equivalent to SNA concept of intermediate
consumption – PPI inputs cover purchases and
operating expenses used in input. Land, labour, and
capital are primary inputs – not included
•
The purpose of the PPI is confirmed: to measure producer output and
input inflation within an SNA framework
•
The SNA provides the internationally recognised framework for
compiling the PPI and supports a key use – deflating gross flows in
national accounts
•
The PPI has multiple uses; the challenge in using the SNA framework
is not to limit the PPI for other key uses, such as inflation analysis and
use in contract indexation
•
Different uses have conflicting requirements
•
Output indexes are based on sales
•
Continue with output and input indexes based on SNA
•
Used as deflators of gross output for calculating
volumes in the national accounts
•
New Zealand national accounts moving towards greater use of the
input indexes
•
Input indexes are based on purchases and operating
expenses
•
Constant-price supply-use tables will require output and input
commodity indexes
•
Input indexes used only selectively in the national
accounts but commonly used in contract indexation
•
Gross weighting concept used at all levels of output
index calculation – values of all outputs in same
industrial classification category are in scope for
weighting and pricing. Preferred for national accounts
deflation of gross flows
•
Gross weighting concept should be used up to at least NZSIOC level 4
– required for national accounts deflation
•
Research impact of compiling higher-level PPI indexes on a net basis.
Would provide better information on usefulness of group indexes,
which are compiled on a gross basis, and whether there is a need for
net weighted indexes at higher levels of aggregation
•
ABS discontinued net weights (2009) in favour of gross weights –
considered there was little impact from double-counting
•
Interested in users’ views on what priority we should give to
•
With gross weighting, the possibility of double
counting inter-industry or inter-sector transactions and
price changes increases with higher levels of index
aggregation – less desirable for monitoring inflation
23
Review of scope and purpose of the producers price index
Topic
Current
Proposed
investigating this issue.
Pricing basis for PPI
•
•
•
Scope of transactions and
transactors for the output PPI
Specific
issues under
scope of
transactions
Ownership of
owneroccupied
dwellings
(OOD)
FISIM
Output prices use tax-free basic prices – the price a
producer receives from the purchaser of goods or
services, minus any tax payable, plus any subsidy
Input prices use a mix of output proxies and directly
surveyed purchaser’s prices – purchaser’s prices
exclude deductible taxes (eg GST) and include trade
and transport margins
Using output proxies assumes constant trade and
transport margins
•
Most market output is included, except private
education and health care
•
Owner occupied dwellings included as a separate
notional industry – in output for own final use
•
Other non-market output excluded
•
OOD included as separate notional industry – in
output for own final use.
•
Including OOD notional output in national accounts
allows comparison of outputs of economies with
different rates of home ownership
•
OOD industry included in all industries index coverage
•
Financial intermediation services indirectly measured
(FISIM) is the margin financial intermediaries earn by
charging higher interest on loans than they pay on
24
•
Interested in users’ views on the appropriateness of continuing to
calculate gross weighted indexes above level 4 NZSIOC
•
Output prices use basic prices – no change
•
Input prices – where possible more purchaser’s prices should be used,
to include margins
•
Consistent with SNA and preferred for other uses
•
Transparency about pricing levels required for users
•
Constant-price supply-use tables – preference is for basic and
purchaser’s prices
•
Respondent load also to be considered
•
Consider including a separate commodity for transport margins
•
Confirmed – no change
•
OOD in scope as a separate industry
•
Publish all industries indexes excluding OOD to represent price change
in market industries
•
Consider practicalities of updating coverage in PPI to conform to
SNA08, which national accounts uses
Review of scope and purpose of the producers price index
Topic
Current
•
Insurance
Proposed
deposits
•
Bank service charge (similar to FISIM) included on
margin basis as output of banking and finance –
conforms with SNA68
Would mean incorporating FISIM component in each industry input
index. FISIM component small in many industries, but significant in
some
•
Interested in users’ views on delaying the updating of FISIM in the PPI
until the national accounts needs deflators that include this component
•
Confirmed – no change
•
Confirmed – no change
•
Weight for insurance in PPI is premiums net of claims
– conforms with SNA treatment
•
Gross premiums used as price indicators
Distribution
industries –
retail and
wholesale
•
Weight for output indexes is margin
•
Selling prices of commodities used as price indicators
•
Weighting and pricing method consistent with SNA –
constant-price margins derived by deflating industry
gross sales
Extending the
scope of the
PPI beyond
GO and IC
•
Requests to extend coverage of PPI beyond gross
output (output indexes) and intermediate consumption
(input indexes) – eg, adding interest charges and local
authority rates
•
Coverage of PPI should conform to SNA
•
Statistics NZ produces other series – eg, labour cost index (LCI) and
capital goods price index (CGPI)
Quarterly, same as CPI
•
Confirmed – no change
•
If CPI changes to monthly frequency PPI does not necessarily need to
change as well
•
Most economic series are published quarterly
•
Confirmed – no change
•
Building block approach gives coherence with SNA and flexibility for
index maintenance
•
PPI commodity index design captures changes in export prices and
import prices separately. The same approach may be considered for
•
Frequency
Industry and commodity detail
•
Hierarchical series of industry indexes down to
NZSIOC level 4
•
Building block commodity indexes – lower-level
aggregates feed inter higher-level commodity indexes
at level NA06CC
25
Review of scope and purpose of the producers price index
Topic
Current
Proposed
the CGPI in regard to import prices
•
Index formula
Stage of processing and stage
of production indexes
•
•
•
•
Weighted price relative form of Laspeyres index formula
used at all levels of index calculation
The PPI manual favours the use of the Jevons formula to
calculate elementary aggregates, which is an unweighted version of the geometric Laspeyres index. The
Jevons formula allows for some substitution where there
is a switch from products with higher price movements to
those with lower relative price movements
Not calculated by Statistics NZ
May provide insight into the inter-linkages between price
movements at different stages of production
Used as headline measures for PPI in US (stage of
processing) and Australia (stage of production)
26
•
Proposed to publish more commodity indexes
•
Weighted price relative form of Laspeyres index formula should
continue to be principal formula used for PPI calculation
•
Use Jevons formula, which allows for some product substitution, for
lower level aggregates where clear price substitution occurs
•
Interested in users’ views on using the Jevons formula for calculating
lower-level aggregate indexes
•
Provides alternative summary PPI measure to all industries indexes
•
Resource demanding to develop
•
Interested in users’ views of these different views on inflation
Appendix 1: Market output and non-market output
Market output
Market output is sold at prices that are economically significant, or is otherwise disposed
of in the market, or intended for sale or disposal on the market. Prices are said to be
economically significant when they have a significant influence on the amounts the
producers are willing to supply and on the amounts the purchasers are willing to buy.
Market output includes:
• The total value of goods and services sold (at economically significant prices).
• The total value of goods and services bartered.
• The total value of goods and services used for payments in kind, including
compensation in kind.
• The total value of goods or services supplied by one establishment, to another
belonging to the same market enterprise, to be used in intermediate inputs.
• The total value of changes in inventories of finished goods and work-in-progress
intended for one or other of the above purposes.
Non-market output
Non-market output is provided without charge or at prices so low they bear no
relationship to production cost. The two types of non-market output are output for own
final use and other non-market output.
Output produced for own final use: goods or services produced by an establishment
and used for its own gross fixed capital formation. Such goods are valued at the basic
prices of similar products sold on the market (or by their costs of production if no suitable
basic prices are available).
Output for own final use includes:
• The production of, for example, machine tools and structures (fixed capital
formation items) by an establishment for the sole use of the establishment itself or
other establishments in the same enterprise.
• The imputed rental value of certain productive assets owned by households, such
as (and currently limited to) owner-occupied dwellings.
• The production of certain other unincorporated household enterprises, such as
agricultural products produced by a farmer for consumption by their own family or
employees.
Other non-market output: goods and individual or collective services provided by nonprofit institutions serving households (NPISHs), or government, that are provided free, or
at prices that are not economically significant, to other institutional units or the community
as a whole.
27
Appendix 2: National Accounts Supply Use
Framework
Table 4 gives an alternative presentation of the PPI coverage. It shows how the PPI and
other price indexes ’fit’ within the supply and use framework commonly used by national
accountants to balance and validate production and expenditure estimates of GDP.
In simple terms, the supply and use framework starts with the production and expenditure
measures of GDP, which are separate estimates of the same thing. That is:
GO - IC = GDP = C + G + I + X – M
This identity is rearranged to provide total supply of goods and services in the economy
(left-hand side) and total use to which those goods and services are put (right-hand side).
That is:
GO + M = IC + C +G + I + X
So the total supply of goods and services in an economy is sourced from either domestic
production (GO) or imports (M). These goods and services are then either consumed by
business through intermediate use (IC), households (C), government (G), businesses
through investment in capital goods and changes in inventories (I), or they are exported
(X).
The output and intermediate use sections of this framework have an industry dimension
(column headings), and there is a commodity dimension to the entire table (row
headings).
28
Review of scope and purpose of the producers price index
Table 4
Simplified national accounts supply and use table
4 Simplified national acc ounts suppl y and us e table
Supply
Output at basic prices
Market
Own use
Product
X
Industry
Product
X
Industry
Other
nonmarket
Product
X
Industry
=
Output at
Basic
prices
X
Industry
=
Output at
Basic
prices
X
Industry
=
Output at
Basic
prices
X
Industry
+
Taxes
less
subsidies
on
products
Product
Imports
+
Product
Intermediate consumption at
purchaser’s prices
Market
Own use
Other
nonmarket
Product
Product
Product
X
X
X
Industry
Industry
Industry
+
+
+
Value
Value
Value
added
added
added
X
X
X
Industry
Industry
Industry
=
=
=
Output at
Output at
Output at
Basic
Basic
Basic
prices
prices
prices
X
X
X
Industry
Industry
Industry
Use
+
Simplified national accounts supply and use table (with price index applications)
Supply
Taxes
less
subsidies
on
products
Output at basic prices
Market
Own use
PPI commodity
indexes basic prices
=
=
PPI output indexes
X
industry
Other
nonmarket
Product
X
Industry
+
Product
=
Output at
Basic
prices
X
Industry
Imports
Market
+
Import
price
index
Own use
PPI commodity
indexes producer
prices
+
+
Value
Value
added
added
X
X
Industry
Industry
=
=
PPI input indexes
X
industry
29
Collective
consumption
Gross
capital
formation
Product
Product
Product
Individual
consumption
Collective
consumption
Gross
capital
formation
Consumers
price index
Product
Capital
goods
price index
Exports
+
Product
Use
Intermediate consumption at
purchaser’s prices
Other
nonmarket
Product
X
Industry
+
Value
added
X
Industry
=
Output at
Basic
prices
X
Industry
Individual
consumption
+
Exports
+
Export
price
index
Appendix 3: Diagramatic example of commodity hierachy in New Zealand PPI
Figure 1
Example of PPI outputs index calculation hierarchy
1 Example of PPI outputs i ndex calc ul ation hier archy
30
Review of scope and purpose of the producers price index
In reality, there will be instances of NA06CC indexes feeding into multiple industry indexes (in particular for the inputs indexes) as illustrated below.
Figure 2
Example of PPI inputs index calculation hierarchy
2 Example of PPI inputs i ndex calc ulation hier archy
31
Appendix 4: Index formula
Elementary aggregate indexes
Elementary aggregate indexes are calculated for the lowest level of aggregation for which
value data are available and used in calculating the PPI. Elementary aggregates are
relatively homogenous sets of goods or services. Their underlying expenditure values are
used as weights when averaging the elementary indexes to obtain indexes for higherlevel aggregates.
The PPI Manual outlines alternative formulae that may be used in calculating the
elementary aggregate indexes (chapter 20). The manual recognises the advantages and
disadvantages of each possible index formula, but generally favours using the Jevons
formula.
The Jevons formula is essentially an unweighted version of the geometric Laspeyres
index. If information was available within the elementary aggregate that could be used to
weight together the price observations (eg outlet or product weights), these weights could
be used to further refine the Jevons index.
The index is expressed as:
𝑃𝑗0:𝑡
𝑝𝑖
𝑤𝑖0
= ∏𝑛𝑖=1 � 0𝑖 �
𝑝𝑖
,
∑𝑛𝑖=1 𝑤𝑖0 = 1 Equation 1,
where the weights (wi0) are the weights (if available) for the price observations within the
elementary price index. Note that where the weights are all equal, the index becomes the
traditional Jevons index.
The index may either be calculated as the weighted geometric mean of price relatives
from the pricing base period (as above), or as a chained index where each period an
index is calculated as the weighted geometric mean of the price relatives from the
previous period, and these indexes are then multiplied together to form the chained
index, as follows:
𝑝𝑗0:3 = 𝑝𝑗0:1 X 𝑝𝑗1:2 X 𝑝𝑗2:3
Equation 2,
Where 𝑝𝑗0:3 is the index at time t=3 with a price reference base of t=0.
The properties of the Jevons formula mimic a level of substitution where there is a switch
from products with higher inflation to those with lower inflation within an elementary
aggregate. This makes sense in a CPI context where consumers may exhibit costminimising behaviour. The manual questions whether this is appropriate for the PPI,
especially output indexes, given that producers are interested in profit maximisation.
However, for PPI the assumption of unit cross-product elasticities of substitution with
equal revenues in both periods is not consistent with producer economic theory.
Revenue-maximizing producers will produce more of the sampled products with aboveaverage price increases, so their share of revenue cannot be expected to be constant.
Indeed the Jevons index, in assuming constant revenue shares, will understate price
changes under such revenue-maximizing behavioral assumptions. The Jevons index
allows implicit quantities to fall as relative prices increase, to maintain equal revenue
share, rather than allowing an increase. (PPI Manual, para 1.162)
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Review of scope and purpose of the producers price index
Higher-level (industry) indexes
Once the elementary aggregate price indexes are defined and compiled, these (or higherlevel commodity indexes) are combined to form the PPI’s industry-level indexes, using
the output value of each commodity as weights.
The IMF Data Quality Assessment Framework (DQAF) for the PPI recommends that “the
method to aggregate elementary indices to higher levels uses an internationally accepted
formula (eg, Laspeyres, Paasche, geometric mean, Fisher).”
Current New Zealand PPI
The most-commonly used formula in New Zealand and internationally is the Laspeyres.
The PPI indexes are compiled using an approximation of this base-weighted formula.
The weighted price relatives form (see description below) of the Laspeyres is used at all
levels of index calculation, from elementary aggregates to higher-level industry indexes.
Where no information is available to weight priced items within lower-level aggregates the
items are equally weighted.
A base-weighted Laspeyres price index measures the changing cost of a fixed basket of
goods and services over time. A PPI outputs index measures the revenue from selling,
while a PPI inputs index measures the cost of purchasing such a basket of goods. The
general form of the Laspeyres formula is:
Where
𝐿𝑝
𝐼𝑡
∑𝑛𝑗=1 𝑝𝑗𝑡 𝑞𝑗0
= 𝑛
× 1000
∑𝑗=1 𝑝𝑗0 𝑞𝑗0
ItLp = Laspeyres price index number at time t
Pjt = The price of good or service j in period t
pj0 = The price of good or service j in period 0 (the base period)
n = the number of goods and services in the basket
This is the expenditure aggregate form of the index. The Laspeyres index is also
expressed in a second form – the weighted price relatives form. Statistics NZ uses this
expression to derive the PPI. The derivation of this form is:
𝐿𝑝
𝐼𝑡 =
∑𝑛𝑗=1 𝑝𝑗𝑡 𝑞𝑗0
× 1000
∑𝑛𝑗=1 𝑝𝑗0 𝑞𝑗0
𝑃𝑗𝑡 =
𝐿𝑝
Let 𝑤𝑗 = 𝑝𝑗0 𝑞𝑗0
𝐼𝑡 =
𝐿𝑝
𝑝𝑗𝑡
𝑝𝑗0 𝑝𝑗0 𝑞𝑗0
× 1000
∑𝑛𝑗=1 𝑝𝑗0 𝑞𝑗0
∑𝑛𝑗=1
𝐼𝑡 =
𝑝𝑗𝑡
× 𝑃𝑗0
𝑝𝑗0
𝑝𝑗𝑡
𝑤
𝑝𝑗0 𝑗
× 1000
∑𝑛𝑗=1 𝑤𝑗
∑𝑛𝑗=1
In words, the relative price of item j when compared with the base period 0 is multiplied
by wj, the weight of item j in the index; wj represents the total cost of qj0 units of good j at
33
Review of scope and purpose of the producers price index
base-period prices. Therefore, the numerator gives the total cost of the fixed basket of
goods in the current period t while the denominator gives the total cost of the fixed basket
of goods in the base period 0. The ratio of these two costs (multiplied by 1000) gives the
price index number. In practice, the weights at each level of the index are scaled to a
consistent sum of 10,000.
Using this formula assumes, through fixed base weights, inelastic demand. That is, there
are no quantity changes or substitution of products in response to price changes or
changes in taste and fashion. This generally means the Laspeyres formula tends to
overstate price change in situations where there is substitution towards products with
relatively lower price movements.
This tendency is mitigated to a large extent in the PPI through annual updates to the
weights. We have updated the industry (NZSIOC level 4) and commodity (NA06CC)
weights annually since implementing the Australian and New Zealand Standard Industrial
Classification 2006 (ANZSIC06) in the March 2011 quarter. The weights are sourced from
the supply-use tables (SUT) produced annually as part of the national accounts. The
weights associated with the commodities, and the weights attached to each industry, are
therefore annually chain-linked. This reflects changes in economy-wide income and
expenditure in the mix of products and the mix of industries.
International practice
The ABS mostly uses the weighted price relatives form of the Laspeyres to calculate
elementary aggregates and higher-level indexes – as does Statistics NZ. However, the
ABS uses Jevons indexes for elementary indexes when weighting data is unavailable.
They are used in only a small number of cases (eg accommodation and postal and
courier services).
34