Item 19: Price and Volume Measures ESTP course on National Accounts ESA 2010 Luxembourg, 17-21 June 2013, BECH Quetelet
Prices and Volume measures Covered in ESA 2010 chapter 10 and 2008 SNA chapter XVI; Commission Decisions 98/715 and 2002/990 and Handbook on price and volume measures 2
Use of data Uses of price and volumes data: Comparing economy over time Comparing different economies at the same time 3
Prices Determined by a market Non-market products? Different types of prices: Basic price Producer price Purchaser price Published price indexes (CPI, PPI) 4
Quantity Value, price and quantity are linked by the fundamental equation: This equation is valid only for homogeneous products 5
Homogeneous products Homogeneous products are products for which it is possible to define units which are all considered equivalent and which can thus be exchanged for the same monetary value A homogeneous product consists of units of the same quality 6
Volumes Seems easy when the product is simple - just a physical quantity (one ton of coal or one cup of coffee.) But volume also includes quality : more value for money Volume = quantity * quality 7
Decomposing values Value = Volume x Price Can also express this as: Volume = => deflation Value Price 8
Constant prices The notion of volume is introduced to eliminate the effect of price changes on a set of products This effect can be offset by calculating what the value of the set of products would have been if there had been no changes in prices 9
Comparing base and current periods The value of a set of products in the current period is: = 1 1 1 v p i i q i The volume can be defined as: = Vol p 0 1 i i q i The volume index is: 0 1 p i i q i IVol = 0 0 p q i i i 10
What are price and volume indices The average of the proportionate changes in the price (or volume) of a specific set of goods and services between two periods of time 11
Volume indices The Laspeyres philosophy time periods 0 and t quantity (volume) relatives qt/q0 weights : share in total value of period 0 Laspeyres volume index (arithmetic mean of quantity relatives) v q q = L = 0 t 0 0 t q v p q 0 0 0 p q 12
Price indices The Laspeyres philosophy time periods 0 and t price relatives pt/p0 weights of period 0 Laspeyres price index L P v p p = 0 t 0 p q 0 0 t 0 = v 0 pq 13
Laspeyres, Paasche and Fischer Laspeyres: weights of period 0 Paasche: weights of period t Fischer: geometric mean of Laspeyres and Paasche 14
Relations between Laspeyres, Paasche and Fischer Value index = Laspeyres volume index * Paasche price index = Paasche volume index * Laspeyres price index = Fischer volume index * Fischer price index 15
Example Value in 2005: 120 Paasche price index 2004-2005: 125 Volume 2005 in prices of 2004: 96 Laspeyres volume index 2004-2005: 120 Value in 2004: 80 Value change = 20% * 25% = 50% 16
Price indices in practice CPIs (HICP), PPIs: all Laspeyres price indices Define precise bundle of goods and services & obtain their value shares in base year (for weighting) Observe monthly prices, by going to shops, magazines, internet, etc. Calculate index 17
Quality Examples of quality physical characteristics accompanying services location timing Price discrimination 18
Dealing with quality change in price indices Depends on the type of product. But generally: Matched models Option pricing Overlapping Expert judgment Hedonics 19
Representativity of weights Laspeyres fixed weights not representative over time -> can create bias in index Paasche and Fischer more representative but difficult in practice because current weights are required 20
Chaining No fixed base year but moving base year: always use weights of previous year to calculate growth rates Chain year-on-year growth rates together to obtain constant price data Commission Decision requires chaining using Laspeyres method Non-additivity will occur in constant price series 21
Base and reference period Base period the period that provides the weights for the index Reference period the period for which the index has the value 100 22
Deflators for market output Best method (A): deflation by appropriate producer price indices: basic prices adjustments for quality changes exact correspondence to products to be deflated concepts according to national accounts (or an indicator proven to be equivalent) 23
Market output (continued) Alternative methods (B): less appropriate PPIs, CPIs, volume indicators Unacceptable methods (C): input methods, secondary indicators, inappropriate price indices To be applied to specific products first 24
Volume of value added Best method: double deflation Alternative method: single deflation 25
Agriculture Usually price*quantity approach so all data are available. Some remaining issues: Production process spread over more than one accounting period Seasonal prices Subsidies 26
Manufacturing Usually PPIs available Unique products large equipment: ships, planes, special machines Computers 27
Construction Wide range of products new construction improvements Unique products -> model prices Production process spread over more than one accounting period 28
Wholesale and retail trade services Trade margins: no direct prices paid for trade services Assumption used: volume of output equals volume of sales How to measure quality of trade services, eg. supermarket versus shop-on-the corner 29
Transport and communication Transport: passenger-kilometres and tonnekilometres are B methods Take account of subsidies Empty bus problem Communications: differentiate household and business purchases 30
Banking Two parts: explicit charges and FISIM For explicit charges price indices can be developed No A method for FISIM B methods for FISIM are the use of volume indicators or to use base year interest rates 31
Non-market services Examples - health, education, defence, administration Difference between individual and collective services (SNA 9.86) Measurement of output in current prices 32
Measuring at constant prices? Distinguish between: Input-based methods - deflating inputs Output-based methods - measuring volume of output using indicators 33
Education One definition quantity of teaching received by students, adjusted to allow for qualities of the services provided, for each type of education What does this mean? Quantity of teaching Adjusted for quality Type of education 34
Health One definition the quantity of health care received by patients, adjusted to allow for qualities of service provided, for each type of health care Looks similar to education What is quantity? 35
Collective services Difficult to define output, but not impossible: Tax system Social Security Public administration? Use of activity indicators Measuring quality 36
Purchasing Power Parities (PPPs) Alternative to exchange rates takes differences in prices across countries into account Made for volume comparisons across countries Calculated on the basis of price and expenditure data collected in a coordinated way across countries Available annually and for countries as a whole 37
What are PPPs? Indicators of price level differences across countries: they tell us how many currency units a given quantity of goods and services costs in different countries. Currency converters: PPPs are used to convert values (eg. GDP) into a common currency that neutralises prices differences 38
What is the Purchasing Power Standard (PPS)? Artificial currency unit: one PPS can buy the same amount of goods and services in each country GDP in PPS = GDP in NC/PPP PPPs can be interpreted as the exchange rate of the PPS against the national currency PPPs are scaled so that GDP of EU27 in euro equals GDP of EU27 in PPS 39
Practical compilation - part I at stage Iprice relatives for individual goods & services (price in euros of a kg of tomatoes in France / price in sterling of a kg of tomatoes in the UK) at stage IIprice relatives for product groups by averaging the price relatives calculated for the individual goods or services in the group (price in euros of a specified basket of vegetables in France / price in sterling of the specified basket in the UK) 40
Practical compilation - part II at stage IIIprice relatives for aggregates by weighting & averaging the price relatives for the product groups comprising the aggregate (price in euros of a given volume of food in France / price in sterling of the same volume of food in the UK) at stage IVaggregate across products and put countries into consistent set by using a consistent algorithm -we use the EKS method for aggregation. 41
Data required for PPPs Prices of precisely specified items (compare like with like) GDP expenditure broken down to basic headings (consistency of prices in PPP and underlying NA) Assorted statistics on CPI and other price indices (turn survey month prices into annual average) Spatial correction coefficients ( turn capital city prices into national averages) 42
Practical measurement of PPPs International Comparison Programme (divide work between EC, OECD, UN - Worldbank) Within Europe, four groups of similar countries with some central co-ordination Per year 2 consumer price surveys (3-year rolling coverage), plus price surveys on housing and government services Every two years, survey of capital goods price 43