Export and Import Price Index Manual : Theory and Practice

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Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
December 2009
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    INTERNATIONAL MONETARY FUND

    Export and Import Price Index Manual

    Theory and Practice

    International Labour Office

    International Monetary Fund

    Organisation for Economic Co-operation and Development

    Statistical Office of the European Communities (Eurostat)

    United Nations Economic Commission for Europe

    The World Bank

    2009

    Copyright © 2009

    International Labour Organization

    International Monetary Fund

    Organisation for Economic Co-operation and Development

    Statistical Office of the European Commission (Eurostat)

    United Nations Economic Commission for Europe

    The World Bank

    Production: IMF Multimedia Services Section

    All rights reserved

    Manufactured in the United States of America

    ISBN 9781589067806

    Cataloging-in-Publication Data

    Export and import price index manual: theory and practice. —

    [Washington, D.C.]: International Monetary Fund, 2009.

    p.; cm.

    “International Labour Organization; International Monetary Fund; Organisation for Economic Co-operation and Development; Statistical Office of the European Communities (Eurostat); United Nations Economic Commission for Europe; World Bank.”

    Includes bibliographical references and index.

    ISBN 978-1-58906-780-6

    1. Price indexes — Statistics — Handbooks, manuals, etc. 2. Imports — Prices — Statistics — Handbooks, manuals, etc. 3. Exports — Prices — Statistics — Handbooks, manuals, etc. I. Title. II. International Monetary Fund.

    HB225.E976 2009

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    Contents

    Foreword

    This Export and Import Price Index (XMPI) Manual replaces the United Nations’ Strategies for Price and Quantity Measurement in External Trade, Series M, No. 66, issued in 1981. The development of the XMPI Manual has been undertaken under the joint responsibility of six organizations—the International Labour Office (ILO), International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), Statistical Office of the European Communities (Eurostat), United Nations Economic Commission for Europe (UNECE), and World Bank—through the mechanism of an Inter-Secretariat Working Group on Price Statistics (IWGPS). It is published jointly by these organizations.

    The Manual contains detailed, comprehensive information and explanations for compiling XMPIs. It provides an overview of the conceptual and theoretical issues that statistical offices should consider when making decisions on how to deal with various problems in the daily compilation of XMPIs, and it is intended for use by both developed and developing countries. The chapters cover many topics; they elaborate on the different practices currently in use, propose alternatives whenever possible, and discuss the advantages and disadvantages of each alternative. Given the comprehensive nature of the Manual, we expect it to satisfy the needs of many users.

    The main purpose of the Manual is to assist producers of XMPIs, particularly countries that are revising or setting up their XMPIs. The Manual draws on a wide range of experience and expertise in an attempt to describe practical and suitable measurement methods. It should also help countries to produce their XMPIs in a comparable way, so that statistical offices and international organizations can make meaningful international comparisons. Because it brings together a large body of knowledge on the subject, the Manual may be used for self-learning or as a teaching tool for training courses on XMPIs.

    Other XMPI users, such as businesses, policymakers, and researchers, make up another targeted audience of the Manual. The Manual will inform them not only about the different methods that are employed in collecting data and compiling such indices, but also about the limitations, so that the results may be interpreted correctly.

    The drafting and revision process has required many meetings over a five-year period, in which XMPI experts from national and international statistical offices, universities, and research organizations have participated. The Manual owes much to their collective advice and wisdom.

    The electronic version of the Manual is available on the Internet at www.imf.org/external/np/sta/tegeipi/. The IWGPS views the Manual as a “living document” that it will amend and update to address particular points in more detail. This is especially true for emerging discussions and recommendations made by international groups reviewing XMPIs, such as the International Working Group on Price Indices (the Ottawa Group) and the International Working Group on Service Sector Statistics (the Voorburg Group).

    Rafael Diez de Medina
    Director
    Department of Statistics
    International Labour Office
    Lidia Bratanova
    Director
    Statistics Division
    United Nations Economic Commission for Europe
    Dominique Strauss-Kahn
    Managing Director
    International Monetary Fund
    Shaida Badiee
    Director
    Development Data Group
    World Bank
    Enrico Giovannini
    Chief Statistician and Director
    Statistics Directorate
    Organisation for Economic Co-operation and Development

    Walter Radermacher
    Director-General
    Statistical Office of the European Communities

    Preface

    Export and import price indices (XMPIs) for a country measure the rate of change over time in the prices of exported and imported goods and services. An export price index (XPI) measures the rate of change in the prices of goods and services sold by residents of that country to, and used by, foreign buyers. An import price index (MPI) measures the rate of change in the prices of goods and services purchased by residents of that country from, and supplied by, foreign sellers.

    This Export and Import Price Index (XMPI) Manual provides a detailed account of the theory and practice of compiling such indices. The Manual is the result of collaborative work by the International Labour Organisation (ILO), the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the Statistical Office of the European Communities (Eurostat), the United Nations Economic Commission for Europe (UNECE), and the World Bank, together with experts from a number of national statistical offices, universities, and other international organizations. In addition, these organizations have consulted with a large number of potential users of the XMPI Manual to get practical input. The organizations responsible for the Manual endorse its principles and recommendations as good practice for statistical agencies in conducting XMPI programs. Because of practical constraints, however, some of the current recommendations may not be immediately attainable by all statistical offices and, therefore, should serve as guideposts for agencies as they revise and improve their programs. In some instances, there are no clear-cut answers to specific index number problems, such as making adjustments for particular types of quality changes, treatment of seasonal goods and services, and handling the appearance of new products. The Manual provides detailed accounts of the underlying principles and economic and statistical theory that should allow statistical offices to derive practical solutions.

    A. Export and Import Price Indices and Unit Value Indices

    Many statistical agencies do not use establishment survey-based price indices of well-specified representative items as the building blocks of their XMPIs but compile unit value indices from the more convenient customs source as surrogates for them. However, common index number compilation issues arise for both unit value indices and XMPIs, including the choice of formulas; treatment of seasonal goods, missing values, quality changes, and new goods; organization and management of the index compilation process; and publication and dissemination of the index. There are also commonalities in the needs of valuation, classification, and the scope of the indices and in use of the same data source for weights—that is, relative nominal value shares based on administrative customs documentation. The analysis of, and recommendations for, an appropriate formula at the higher level of aggregation, the subject of Chapters 16 through 18, applies to XMPIs based on both unit value indices and price survey indices. The Manual considers all of these issues in detail. The Manual treats the component unit value indices as surrogates for price indices and as a result, the issues discussed in the context of XMPIs apply equally to unit value indices. The main difference between the two indices is the source of data and aggregation methods used for the measures of price changes at the elementary level. The distinction between the two approaches appears mostly in Chapter 7 on price collection, and the use of unit value indices is addressed directly in Chapter 2.

    International guidelines on choosing between unit value- and price index-based XMPIs were provided by the United Nations (1981)Strategies for Price and Quantity Measurement in External Trade. The strategic case for customs-based unit value indices in United Nations (1981) was based on the relatively low cost of such data. Unit value indices were advised for countries with a tight or medium budget, and well-endowed countries were advised to base their external trade price indices on establishment price survey data. The preference for price survey indices was, in large part, due to a potential bias in unit value indices mainly attributed to changes in the mix of the heterogeneous items recorded in customs documents, but it was also attributed to the often poor quality of recorded data on quantities.1 The former is particularly important in modern product markets given the increasing differentiation of products and turnover of differentiated products. Unit value indices may suffer further in recent times owing to an increasing irrelevance of the source data: first, increasing proportions of trade are in services; second, countries in customs and monetary unions are unlikely to have intra-union trade data as a by-product of customs documentation; and finally, some trade may not be covered by customs controls, such as of electricity, gas, and water, or may be of “unique” goods, such as ships and large machinery, with profound measurement problems for unit value indices.

    Few, including United Nations (1981), deny that narrow specification price indices provide the best measures of relative price change and that, a priori, there are potentially significant biases in using customs unit value indices to measure export and import price changes. Yet unit value proxies are still used because they are by-products of existing customs administration systems and have relatively low incremental cost compared with the price surveys of establishments needed for narrow specification prices. In view of the low cost of the data, the bias in unit value was judged by United Nations (1981) to be tolerable enough that countries were advised to continue compiling them if they do not produce narrow specification price indices. Notwithstanding the putative low cost of obtaining unit values, the Manual in Chapter 2 revisits this strategic advice.

    The Manual recommends that countries using unit value indices with limited resources undertake a staged progression to price indices primarily based on establishment surveys. The initial stage will be to collect price data from establishments responsible for relatively high proportions of exports and imports, particularly those with a relatively large weight and whose unit value indices are at first view inadequate measures of price changes, largely because of the churn in highly differentiated products, or the custom-made nature of the products, such as shipbuilding and oil platforms. It may be that the progression is much quicker, to prepare for the formation of a customs union and loss of intra-union trade data. If the country compiles a producer price index (PPI), much of the technical skills required, and the basis for data collection, will be in place. The rationale for this strategic advice is given in Chapter 2 of the Manual.

    B. The Export and Import Price Index Manual

    The XMPI Manual serves the needs of different audiences. On the one hand are the compilers of XMPIs. This Manual and other manuals, guides, and handbooks are important to compilers for several reasons. First, there is a need for countries to compile statistics in comparable ways so they can make reliable international comparisons of economic performance and behavior using the best international practices. Second, statisticians in each country should not have to decide on methodological issues alone. The Manual draws on a wide range of experience and expertise in an attempt to outline practical and suitable measurement methods and issues. Such measurement methods and issues are not always straightforward, and the Manual benefits from recent theoretical and practical work. Third, much of the written material in some areas of XMPI measurement covers a range of publications. This Manual brings together a large amount of what is known on the subject. It may therefore be useful for reference and training. Fourth, the Manual provides an independent reference on methods against which a statistical agency’s current methods, and the case for change, can be assessed. The Manual should serve the needs of users. Users should be aware not only of the methods employed by statistical offices in collecting data and compiling the indices, but also of the potential such indices have for errors and biases, so that users can properly interpret the results. For example, index number theory presents many issues on formula bias, and the Manual deals extensively with the subject.

    Collecting data for XMPIs is not a trivial matter. Unit value indices are a readily available by-product of the collection of trade data by customs authorities and, because of this, have served as surrogates for price indices. However, as noted above, unit value indices are recognized as being prone to bias. Survey-based XMPIs are the preferred alternative. Yet in practical terms, these require sampling from a representative sample of establishments, a set of well-defined commodities whose overall price changes are representative of those of the millions of transactions taking place. Statistical offices then monitor the prices of these same commodities on a periodic basis (usually monthly) and weight their price changes according to their trade shares, primarily based on nominal trade value shares from customs data. However, the quality of the commodities produced may be changing, with new establishments and commodities appearing and old ones disappearing on both a seasonal and permanent basis. Statistical offices need to closely monitor potential changes in quality. Yet the index compilers must complete the task of producing a representative index in a timely manner each month.

    It is also important to have a well-developed theoretical basis for compiling such indices that is readily accessible for practitioners and users alike. There should be a firm understanding of user needs and how the index delivered fits them. Fortunately, there is a great body of research in this area, much of which is fairly recent. This Manual covers the theoretical basis of index numbers to help support some of the practical considerations.

    This Manual provides guidelines for statistical offices or other agencies responsible for compiling XMPIs, bearing in mind the limited resources available. Calculating an XPI or MPI cannot be reduced to a simple set of rules or a standard set of procedures that can be mechanically followed in all circumstances. Although there are certain general principles that may be universally applicable, the procedures followed in practice have to take account of country-specific circumstances. Statistical offices have to make choices. These include procedures for the collection or processing of the price data and the methods of aggregation. Other important factors governing methodology are the main use of the index, the nature of the markets and pricing practices within the country, and the resources available to the statistical office. The Manual explains the underlying economic and statistical concepts and principles needed to enable statistical offices to make their choices in efficient and cost-effective ways and to recognize the full implications of their choices.

    The Manual draws on the experience of many statistical offices throughout the world. The procedures they use are not static, but continue to evolve and improve, for a variety of reasons. First, resource constraints and custom and practice can inhibit innovation; the bias in unit value indices as surrogates for price indices has been well understood for many years. However, the transition of countries to survey-based price indices has been gradual and is still under way. Second, research continually refines the economic and statistical theory underpinning XMPIs and strengthens it. For example, recent research has provided clearer insights about the relative strengths and weaknesses of the various formulas and methods used to process the basic price data collected for XMPI purposes. Third, recent advances in information and communications technology have affected XMPI methods. Both theoretical and data developments can impinge on all the stages of compiling an XMPI. New technology can affect the methods used to collect prices and relay them to the central statistical office. It can also improve the processing and checking, including the methods used to adjust prices for changes in the quality of the goods and services covered. Fourth, improved formulas help in calculating more accurate higher-level indices.

    C. Background to the Present Revision

    Some international standards for economic statistics have evolved mainly to compile internationally comparable statistics. However, standards may also be developed to help individual countries benefit from the experience and expertise accumulated in other countries. All countries stand to gain by exchanging information about index methods. The United Nations published the Manual on Producers’ Price Indices for Industrial Goods, Series M, No. 66 (United Nations, 1979), and Strategies for Price and Quantity Measurement in External Trade, Series M, No. 69 (United Nations, 1981) about 30 years ago. The methods and procedures presented then are now outdated. Index number theory and practice and improvements in technology have advanced greatly over the past two decades.

    C.1 Concerns with current index methods

    The XMPI Manual takes advantage of the wealth of recent research on index number theory. It identifies many concerns and recommends many new practices instead of just codifying existing statistical agency practices, some of which are listed below.2

    First, it provides a detailed, if somewhat critical, outline of the use of unit value indices based on customs data for XMPI compilation and provides a strategy for countries wishing to establish or develop their XMPIs by making use of price data from establishment surveys (Appendix 1 to Chapter 1 and Chapter 2).

    Second, it outlines how XMPIs fit into the 2008 System of National Accounts (2008 SNA).3 Although XMPIs are important economic indicators in their own right, a vital use of XMPIs is as deflators of series of nominal values of exports and imports to contribute to the derivation of volume estimates of GDP by the expenditure approach. Exports and imports are defined by the 2008 SNA, from a nonresident’s or rest of the world’s perspective: exports are the rest of the world’s uses of domestic production and imports are the rest of the world’s supply of goods and services to resident users.

    Principles for valuation and time of recording follow from the 2008 SNA. An important feature of the 2008 SNA is the use of supply and use tables (SUTs) that balance, at a detailed product group level, the supply of output and imports with the uses of intermediate consumption, final consumption, capital formation, and exports. This helps reconcile the major flows in an economy at a detailed level. The 2008 SNA (Chapter 14) also advises that SUTs be developed in volume terms, for which it is good practice that price deflators be applied at a detailed product group level. The deflation of the aggregates at the level of product groups to provide SUTs in volume terms provides a framework for deflators to be applied in a manner that reconciles the volume estimates, and thus price indices (deflators), for all transactions of goods and services supplied and used. This requires that for each product group, each estimate of output, intermediate consumption, final consumption, capital formation, and exports and imports be deflated. Because supply should equal uses, with adjustments for consistent valuation, in volume terms as well as at current prices, the deflators, including the XMPIs, benefit from this reconciliation of the volume estimates. XMPIs as deflators at the detailed level are developed as part of an integrated and consistent system. Chapters 4 and 15 outline this reconciliation and how different valuation systems enable it.

    However, if XMPIs are to be used to analyze the transmission of inflation, terms of trade changes and their effect, and productivity changes, it is the resident’s perspective that is appropriate, and Chapter 4 explains the valuation basis that results from this. Although the niceties of different valuation systems can be largely observed when using establishment-based survey data, this is not true of the f.o.b. (free on board) and c.i.f. (cost, insurance, and freight) valuations used mainly in customs data for merchandise trade exports and imports. Chapter 4 considers how such customs valuations relate to the desired valuation methods.

    Third, the XMPI Manual is concerned with appropriate index number formulas. The standard methodology for a typical XMPI is based on a Laspeyres price index with fixed quantities from an earlier base period. The construction of this index can be thought of in terms of selecting a basket of goods and services representative of base-period trade values (exports or imports), valuing this at base-period prices, and then repricing the same basket at current-period prices. The target XMPIs in this case are defined as the ratios of these two trade values. Practicing statisticians use this methodology because it has at least three practical advantages. It is easily explained to the public, it can use inexpensive, though untimely, weighting information from the date of the last (or an even earlier) survey or administrative source (rather than requiring sources of data for the current month), and it need not be revised if users accept the Laspeyres premise. One notable advantage of the Laspeyres approach under the ease of explanation heading is its consistency in aggregation. It produces various breakdowns or subaggregates related to one another in a particularly simple way.

    Statistical agencies implement the Laspeyres index by putting it into price-relative (price change from the base period) and trade-value-share (from the base period) format. In this form, the Laspeyres index can be written as the sum of base-period trade value shares of the items in the index times their corresponding price relatives. Unfortunately, simple as it may appear, there still are a number of practical problems with producing the Laspeyres index exactly. Consequently, statistical agency practice has introduced some approximations to the theoretical Laspeyres target.

    • Accurate trade value shares for the base period down to the finest level of commodity aggregation are not always available, so statistical agencies are often forced to settle for getting base-period trade value weights at a higher than desirable level of aggregation.

    • For each of the chosen commodity category aggregates, agencies collect a sample of representative prices for specific transactions from establishments rather than attempting to enumerate every possible transaction. They use equally weighted (rather than traded-value-weighted) index formulas or unit value indices to aggregate these elementary product prices into an elementary aggregate index, which will be used as the price relative for each of the commodity category groups in the final Laspeyres formula. Practitioners recognize that this two-stage procedure is not exactly consistent with the Laspeyres methodology (which requires weighting at each stage of aggregation). However, for a number of theoretical and practical reasons, practitioners judge that the resulting elementary index price relatives will be sufficiently accurate to insert into the Laspeyres formula at the final stage of aggregation.

    The above standard index methodology dates back to the work of Mitchell (1927) and Knibbs (1924) and other pioneers who introduced it about 80 years ago, and it is still used today.

    Although most statistical agencies have traditionally used the Laspeyres index as their target index, both economic and index number theory suggest that some other types of indices may be more appropriate target indices to aim for: namely, the Fisher, Walsh, or Törnqvist-Theil indices. As is well known, the Laspeyres index has an upward bias compared with these target indices. Of course, these target indices may not be achievable by a statistical agency, but it is necessary to have some sort of theoretical target to aim for. Having a target concept is also necessary, so that the index that is actually produced by a statistical agency can be evaluated to see how close it comes to the theoretical ideal. In the theoretical chapters of this Manual, it is noted that there are four main approaches to index number theory:

    1 Fixed-basket approaches and symmetric averages of fixed baskets (Chapter 16),

    2 The stochastic (statistical estimator) approach to index number theory (Chapter 17),

    3 Test (axiomatic) approaches (Chapter 17), and

    4 The economic approach (Chapter 18).

    Approaches 3 and 4 will be familiar to many price statisticians and expert users of the XMPI, but perhaps a few words about approaches 1 and 2 are in order.

    The Laspeyres index is an example of a fixed-basket index. The concern from a theoretical point of view is that it has an equally valid “twin” for the two periods under consideration—the Paasche index, which uses quantity weights from the current period. If there are two equally valid estimators for the same concept, then statistical theory tells us to take the average of the two estimators in order to obtain a more accurate estimator. There is more than one way of taking an average, however, so the question of the “best” average to take is not trivial. The Manual suggests that the “best” averages that emerge for fixed-base indices are the geometric mean of the Laspeyres and Paasche indices (Fisher ideal index) or using the geometric average of the quantity weights in both periods (Walsh index). From the perspective of a statistical estimator, the “best” index number is the geometric average of the price relatives weighted by the average revenue share over the two periods (Törnqvist-Theil index).

    It is usually the case that current period weights are unavailable in real time so a Laspeyres-type index is compiled. The Manual allows us to understand the nature of the bias arising from not using the best formula. It also recommends compiling a retrospective analytical series using a Fisher or Törnqvist-Theil price index formula to provide an estimate of the magnitude of bias from the index number formula.

    At the final stage of aggregation, the standard XMPI index is not a true Laspeyres index, because the trade value weights pertain to a reference base year that is different from the base month (or quarter) for prices. Thus the trade value weights are chosen at an annual frequency, whereas the prices are collected at a monthly frequency. To be a true Laspeyres index, the base-period trade value should coincide with the reference period for the base prices. In practice, the actual index used by many statistical agencies at the last stage of aggregation has a weight reference period that precedes the base-price period. Indices of this type are likely to have some upward bias compared with a true Laspeyres index, as are indices compiled using trade value weights that are price-updated from the weight reference period to the Laspeyres base period. It follows that they must have definite upward biases compared with theoretical target indices such as the Fisher, Walsh, or Törnqvist-Theil indices.

    At the early stages of aggregation, unweighted averages of prices or price relatives are used. Until relatively recently, when enterprise data in electronic form have become more readily available, it was thought that the biases that might result from the use of unweighted indices were not particularly significant. However, recent evidence suggests that there is potential for significant upward bias at lower levels of aggregation compared with results that are generated by the preferred target indices mentioned above.

    There is one additional result from index number theory that should be mentioned here—the problem of defining the price and quantity of a commodity that should be used for each period in the index number formula. The problem is that the establishment may have purchases or sales within a particular product specification in the period under consideration for many transactions at a number of different prices. So the question arises, what price would be most representative of the purchases or sales of these transactions for the period? The answer to this question is obviously the unit value for the transactions for the period, because this price will match up with the quantity sold during the period to give a product that is equal to the trade value. Note that the Manual does not endorse taking unit values over heterogeneous items at this first stage of aggregation; it endorses only taking unit values over identical items within each period.

    The fourth major concern with the standard XMPI methodology is that, although statistical agencies generally recognize that there is a problem with the treatment of quality change and new goods, it is difficult to work out a coherent methodology for these problems in the context of a fixed-base Laspeyres index. The most widely recognized good practice in quality-adjusting price indices is “hedonic regression,” which characterizes the price of a product at any given time as a function of the characteristics it possesses relative to its near substitutes. However, there is a considerable amount of controversy on how to integrate hedonic regression methodology into the XMPI’s theoretical frameworks. The theoretical and practical chapters in the Manual devote a lot of attention to these methodological problems. The problems created by the disappearance of old goods and the appearance of new models are now much more severe than they were when the traditional XMPI methodology was developed some 30 years ago. For many categories of products, those priced at the beginning of the year are simply no longer available by the end of the year. Thus, there is a tremendous concern with sample attrition, which affects the overall methodology; that is, at lower levels of aggregation, it becomes necessary (at least in many product categories) to switch to chained indices rather than use fixed-base indices. Certain unweighted indices have substantial bias when chained.

    A fifth major area of concern is related to the first concern: the treatment of seasonal commodities. The use of an annual set of products or the use of annual revenue shares is justified to a certain extent if one is interested in the longer-run trend of price changes. If the focus, however, is on short-term, month-to-month changes (as is the focus of central banks), then it is obvious that the use of annual weights can lead to misleading signals from a short-run perspective, because monthly price changes for products that are out of season (i.e., the seasonal weights for the product class are small for the two months being considered) can be greatly magnified by the use of annual weights. The problem of seasonal weights is a big one when the products are not available at all at certain months of the year. There are solutions to these seasonality problems, but the solutions involve the construction of two indices: one for the short-term measurement of price changes and another (more accurate) longer-term index that is adjusted for seasonal influences. This may give rise to confusion among users as to which index is correct and thus does not appeal to traditional index number statisticians.

    A sixth concern is that the typical XMPI currently produced will generally exclude services. A typical XMPI will include merchandise trade and, possibly, electricity, gas supply, and water supply activities. Many countries will also include, or have separate indices for, agricultural and commodity prices. Thus, XMPI coverage includes many more goods-producing activities than services. In a way, this just reflects the historical origins of existing index number theory. Trade in goods was very much more significant than services. Hence, there was not much focus on the problems involved in measuring trade in services. It is only over the past 30 or so years that trade in services has become significant. In addition to inertia, there are some serious conceptual problems involved in measuring the prices of many services, such as insurance, financial, and entertainment services. In many cases, statistical agencies simply do not have appropriate methodologies to deal with these difficult conceptual measurement problems.4 It is further the case that the source data on weights and unit value indices have been administrative customs documentation based on merchandise trade with a methodology initially dedicated to the collection of merchandise trade statistics and then subsequently, and separately, extended to services.5 Thus, import and export prices for these service sectors are not widely measured.

    A seventh concern arises because the value that multinational enterprises accord to international transactions between divisions operating in different countries, transfer prices, may not be market-driven prices, but dictated by a strategic decision to minimize taxes, given that rates of business income taxation differ across countries. Chapter 19 discusses the issues related to transfer prices and offers solutions. The best alternative to a firm’s listed transfer price is an internal comparable price for the two periods compared; that is, the average price paid to (for an imported commodity) or received from (for an exported commodity) unaffiliated firms for the same commodity during the reference period, if such unaffiliated purchases or sales exist.

    An issue of interest to users is that once XMPIs have been compiled, it is a natural next step to compile terms of trade indices as the ratio of the XPI to the MPI. Although the calculation of such ratios is straightforward, a question of natural interest to economists is how changes in the terms of trade of an economy affect the real income of the economy; as Chapter 24 demonstrates, this is more complex. The analysis draws on the economic theory of Chapter 18 and shows how the product of superlative import and superlative export price indices can best account for changes in real income generated by the production sector. Because households frequently directly import consumer goods and services from abroad, without these goods and services passing through the production sector of the economy, the chapter also considers the appropriate measurement of the effect of changes in the prices of imported goods on a household’s cost of living. Again, superlative price indices are shown to be appropriate.

    Many of the above areas of concern are addressed in this XMPI Manual. Frank discussions of these concerns should stimulate the interest of academic economists and statisticians to address these measurement problems and to provide new solutions that can be used by statistical agencies. Public awareness of these areas of concern should lead to a willingness on the part of governments to allocate additional resources to statistical agencies so that economic measurement will be improved. In particular, there is an urgent need to fill in some of the gaps that exist in the measurement of service sector imports and exports.

    C.2 Efforts to address the concerns in index number methods

    Several years ago it became clear that the outstanding and controversial methodological concerns related to price indices needed further investigation and analysis. An expert group consisting of specialists on price indices from national and international statistical offices and universities from around the world formed to discuss these concerns. It met for the first time in Ottawa in 1994. During 10 meetings between 1994 and 2009, the Ottawa Group presented and discussed more than 160 research papers on the theory and practice of price indices. While much of the research related to consumer price indices (CPIs), many of the issues carry across to XMPIs. It became obvious there were ways to improve and strengthen existing XMPI and CPI methods.

    In addition, the Voorburg Group on Service Sector Statistics, with members from many national statistical offices, has held annual meetings for more than a decade. Many agenda topics of the Voorburg Group related to expanding country PPIs to cover service industries and products, though the principles extend readily to XMPIs. The group has provided many technical papers on concepts and methods that serve as documentation other countries can follow.

    At the same time, the control of inflation had become a high-priority policy objective in most countries. Policymakers use the CPI, PPI, and XMPIs widely to measure and monitor inflation. The slowing down of inflation in many parts of the world in the 1990s, compared with the 1970s and 1980s, increased interest in XMPI and PPI and CPI methods rather than reducing it. There was a heightened demand for more accurate, precise, and reliable measures of inflation. When the rate of inflation slows to only 2 or 3 percent each year, even a small error or bias becomes significant.

    Recent concern over the accuracy of price indices led governments and research institutes in a few countries to commission experts to examine and evaluate the methods used, particularly for the CPI. The methods used to calculate have been subject to public interest and scrutiny of a kind and level that were unknown in the past. One conclusion reached is that existing methods might lead to some upward bias in CPIs. One reason for this was that the methods employed by many statistical agencies made inadequate allowance for changes in the quality of the goods and services priced. The same problem applies to XMPIs. The direction and extent of such bias will, of course, vary between commodity groups, and its total effect on the economy will vary among countries. However, the upward bias has the potential to be large, so this Manual addresses adjusting prices for changes in quality in some detail, drawing on the most recent research in this area. There are other sources of bias, including that arising from no allowance, or an inappropriate one, made for changes in the bundle of items produced, when purchases or production switches between commodities with different rates of price change. Further, different forms of bias might arise from the sampling and price collection system. Several chapters deal with these subjects, with an overall summary of possible errors and biases given in Chapter 12.

    CPIs are widely used for the index linking social benefits such as pensions, unemployment benefits, and other government payments. The cumulative effects of even a small bias could have notable long-term financial outcomes for government budgets. Similarly, a major use of XMPIs is as an escalator for price adjustments to long-term contracts. Agencies of government, especially ministries of finance, and private businesses have taken a renewed interest in price indices, examining their accuracy and reliability more closely and carefully than in the past.

    Developments were also being made in statistics on international trade derived from customs documentation. The United Nations (1998a) guidelines on Concepts and Definitions for international merchandise trade statistics was followed by a Compilers Manual in 2004—a draft supplement to the Compilers Manual is being prepared at the time of this writing. A further revision (Rev. 3) to Concepts and Definitions is planned for 2010.6

    D. Organization of the Revision

    D.1 Background

    In response to the various developments outlined above, the need to revise, update, and expand the UN price statistics manuals was gradually recognized and accepted during the late 1990s. The joint UNECE/ILO meeting of national and international experts on CPIs held at the end of 1997 in Geneva made a formal recommendation to revise Consumer Price Indices: An ILO Manual (ILO, 1989). The main international organizations interested in measuring inflation agreed to take responsibility for the revision. The United Nations Statistical Commission in 1998 approved this strategy and agreed to set up the Inter-Secretariat Working Group on Price Statistics (IWGPS). The terms of reference of the IWGPS, presented to the United Nations Statistical Commission in 1999 at its thirtieth session, emphasized the development of standards and manuals on consumer price indices, producer price indices, and export-import price indices. In its report to the thirty-fourth (2003) session of the Statistical Commission, the Task Force on International Merchandise Trade Statistics stated the need for a manual on international trade price indices to be developed through an inter-agency effort. One of the first decisions of the IWGPS was to produce a new international PPI Manual at the same time as the CPI Manual. Both manuals were published in 2004, the CPI Manual by the ILO and PPI Manual by the IMF. The IWGPS decided at its fifth meeting, held in December 2003, to follow with the production of an XMPI Manual. The first meeting of the Technical Expert Group for this Manual was in June 2004.

    The IMF coordinated the work on the XMPI Manual with a view of fostering coherence in structure and style with the CPI and PPI Manuals developed by the IWGPS and adopt, wherever appropriate, consistent contents, terminology, and methodology. A draft version of the XMPI Manual was completed in 2006. This initial draft XMPI Manual was adapted from the PPI Manual (by IMF staff and a few other specialists) and posted on the IMF website, www.imf.org/external/np/sta/tegeipi/index.htm.

    The Statistics Department of the IMF (STA) wrote in 2006 to each national statistical office and other interested organizations, including the OECD and World Trade Organisation (WTO), requesting comments on the draft chapters. As a further part of the XMPI Manual review process STA organized a seminar on the draft manual held in Washington D.C., during September 25–29, 2006. Participants included a focus group of compilers from selected national statistical offices and experts in the field that included many IWGPS members. Aside from reviewing individual chapters, participants discussed comments from the United Nations Statistics Division (UNSD) and WTO on the need to further embrace unit value indices and the need for evidence-based comments on the subject. An IMF discussion paper was prepared in response to this concern7 and presented at a meeting hosted by the WTO of the Task Force on Merchandise Trade Statistics in May 2007. At the meeting, the IMF agreed to include a new Chapter 2 on unit value indices. The IMF seminar also included an active discussion of the resident’s and nonresident’s perspectives to XMPIs. Following the seminar, written comments on each chapter were sent to the originating PPI authors who were asked to update the current versions of their chapters. Further reviews were sought and obtained as relevant, including comments by the WTO and UNSD on earlier chapters. A revised draft was posted on the IMF website in April 2008 and discussed with IWGPS members.

    D.2 Agencies responsible for the revision

    The following international organizations—concerned with measuring inflation, with policies designed to control inflation, and with measurement of deflators for national accounts—collaborated on revising the CPI, PPI, and XMPI Manuals:

    • The International Labour Organization,

    • The International Monetary Fund,

    • The Organisation for Economic Co-operation and Development,

    • The Statistical Office of the European Communities,

    • The UN Economic Commission for Europe, and

    • The World Bank.

    These organizations have provided, and continue to provide, technical assistance on CPIs, PPIs, and XMPIs both to developing countries and to countries in transition from planned to market economies. The group’s role was to appoint various experts as authors and to provide substantive advice on the contents of the chapters of the draft manual and organize and manage the process of writing, publishing, and disseminating the XMPI Manual.

    The experts taking part were invited in their personal capacity as experts and not as representatives, or delegates, of the national statistical offices or other agencies that employed them. Participants were able to give their expert opinions without in any way committing the offices from which they came.

    D.3 Links with the new consumer and producer price index manuals

    The XMPI Manual was a natural progression from the CPI and PPI Manuals (ILO and others, 2004a and 2004b) and it thus benefited from shared conceptual and practical issues. The manuals have similar contents and are, where applicable, fully consistent with each other conceptually, sharing common text when suitable. The three manuals are each self-contained but share common approaches and conceptual groundings and, as a set, benefit from an internal coherency. However, some features of XMPI compilation are distinct from their CPI and PPI counterparts, and the XMPI Manual departs from the CPI and PPI Manuals in a number of respects, the most notable being the following:

    • It includes a new chapter on unit value indices (Chapter 2);

    • It includes a new chapter on transfer pricing (Chapter 19);

    • It includes a new chapter on terms of trade measurement (Chapter 24);

    • It is compatible with 2008 SNA, especially with regard to the resident’s versus nonresident’s approach to XMPI measurement, to serve different uses, that is particular to XMPIs (Chapters 4, 15, 18, and 20);

    • Attention is given to the use of the information from administrative customs documents as a sampling frame for both commodities and establishments (Chapter 6); and

    • The primary source data for weights are administrative data that have particular merits for the frequent updating of weights if sufficiently timely and reliable (Chapters 5, 16, and 20).

    E. Acknowledgments

    The XMPI Manual is the result of a five-year process that involved multiple activities. The starting point was an adaptation of the PPI Manual primarily by Kim Zieschang (IMF) and Mick Silver (IMF), posted on the IMF website in 2006. Thomas Alexander (IMF) and Maria Mantcheva (IMF) also contributed by respectively redrafting Chapters 4 and 5 and undertaking additional calculations for some of Chapter 20. Following the September 2006 Washington, D.C., seminar on the draft manual, and request for and receipt of comments from national statistical offices and other interested organizations and individuals on the draft, most of the originating PPI Manual authors for each chapter were asked to adapt their chapters to take account of the comments received. The posted chapters were substantially revised and reposted on the IMF website in April 2008.

    We are particularly grateful for helpful comments to Bert Balk (Statistics Netherland and Erasmus University) and to the following people: David Collins (Australian Bureau of Statistics (ABS)), Renaud DeCoster, Luis G. González-Morales (UNSD), Carsten Hansen (UNECE), Anne Harrison (IMF/World Bank), Johannes Hoffmann (Deutches Bundesbank), Joost Huurman (Statistics Netherlands), Ronald Jansen (UNSD), Ronald Johnson (U.S. Bureau of Labor Statistics (BLS)), Yann Marcus (WTO), Andreas Maurer (WTO), Věra Petrásková (Czech Statistical Office), Klaus Poetzsch (Statistisches Bundesamt), Marshall Reinsdorf (U.S. Bureau of Economic Analysis), Ian Richardson (U.K. Office for National Statistics (ONS)), Henk Verduin (Statistics Netherlands), Roberto Vilarrubí (The Barrie School, Silver Spring, Maryland), and Keith Woolford (ABS).

    While helpful comments were received from a number of statistical offices, special recognition is given for their help to the Statistical Offices of Israel, the Netherlands, Nepal, and the United States and to members of the Task Force on Merchandise Trade Statistics.

    The participants in the September 2006 Washington, D.C., seminar on the draft manual included the following: Bill Alterman (BLS), Paul Armknecht (expert), Eleonora Baghy (Hungarian Central Statistical Office), Bert Balk (Statistics Netherland and Erasmus University), Brian Costello (BLS), Viviana Depino De Aviles (National Institute of Statistics and Censuses (INDEC), Argentina), W. Erwin Diewert (University of British Columbia), Carsten Hansen (UNECE), Martin Kullendorff (Statistics Sweden), Alberto Lizaola (National Institute of Statistics and Geography (INEGI), Mexico), Rob McClelland (BLS), David Mead (BLS), Marshall Reinsdorf (U.S. Bureau of Economic Analysis (BEA)), Sabrina Sabri (Department of Statistics, Malaysia), Mick Silver (IMF), Tõnu Täht (Statistics Estonia), Bee Yian Tan (Singapore Department of Statistics), Ted To (BLS), Bulent Tungul (State Institute of Statistics, Turkey), Zaki Twalbeh (Department of Economic Statistics, Jordan), Michelle Vachris (Christopher Newport University), Henk Verduin (Statistics Netherlands), and Sharon Willis (Statistical Institute of Jamaica).

    Members of the Inter-Secretariat Working Group on Price Statistics (IWGPS), under whose aegis this manual was written, were the following:8 Paul Armknecht (expert—PPI Manual editor), Bert Balk (Statistics Netherlands and Erasmus University), Pam Davies (ONS),* Erwin Diewert (University of British Columbia), Yuri Dikhanov (World Bank),* David Fenwick (ONS), Tarek Harchaoui (Statistics Canada),* Carsten Hansen, (UNECE), Keith Hayes (Eurostat),* Peter Hill (expert—CPI Manual editor), Walter Lane (BLS),* Alexandre Makaronidis (Eurostat),* Joaquim Oliveira (OECD),* David Roberts (OECD), Paul Schreyer (OECD),* Mick Silver (IMF), Valentina Stoevska (ILO), Keith Woolford (ABS), and Kimberly Zieschang (IMF).

    The editor of the XMPI Manual is Mick Silver (IMF).

    The author, or authors, of the chapters are a movable feast with, to maintain internal coherency between the manuals, text from the CPI Manual carrying over to the PPI Manual and, again, to the XMPI Manual, as applicable. The attribution of authorship recognizes this and the attribution given below is for, in large part, that of the PPI Manual, edited by Paul Armknecht (which carried over from the CPI Manual, edited by Peter Hill), with the addition of any authors who made substantive contributions to chapters in the writing of this manual. Generally, the originating PPI authors were responsible for much of the often substantial adaptation of material necessary for the XMPI Manual. Chapters 2, 19, and 24 are new to the XMPI Manual.

    Erwin Diewert merits a special note of appreciation. He has been either sole or joint author of all the chapters concerning theoretical issues that provide the underpinnings of much of the manual.

    PrefacePaul Armknecht, W. Erwin Diewert, Peter Hill, and Mick Silver.
    Reader’s GuidePaul Armknecht and Peter Hill.
    Chapter 1A summary of export and import price index methodology, Paul Armknecht, David Collins, Peter Hill, and Mick Silver.
    Chapter 2Unit value indices, Mick Silver.
    Chapter 3The price and volume of international trade: background, purpose, and uses of export and import price indices, Andrew Allen, Paul Armknecht, and David Collins.
    Chapter 4Coverage, valuation, and classifications, Thomas Alexander and Paul Armknecht.
    Chapter 5Data sources, Maria Mantcheva.
    Chapter 6Sampling issues in price collection, Paul Armknecht and Fenella Maitland-Smith.
    Chapter 7Price collection, Andrew Allen, Paul Armknecht, Matthew Berger, David Collins.
    Chapter 8Treatment of quality change, Mick Silver.
    Chapter 9Commodity substitution, sample space, and new goods, Mick Silver.
    Chapter 10XMPI calculation in practice, W. Erwin Diewert, Carsten B. Hansen, Peter Hill, and Robin Lowe.
    Chapter 11Treatment of specific products and issues, Dennis Fixler and Michelle Vachris; contributions from Australian Bureau of Statistics, Statistics Canada, Statistics Singapore, and U.S. Bureau of Labor Statistics.
    Chapter 12Errors and bias in XMPIs, Mick Silver.
    Chapter 13Organization and management, Bill Alterman, David Fenwick, and Yoel Finkel.
    Chapter 14Publication, dissemination, and user relations, Paul Armknecht, Tom Griffin, and David Mead.
    Chapter 15The system of price statistics, Kim Zieschang.
    Chapter 16Basic index number theory, W. Erwin Diewert and Paul Armknecht.
    Chapter 17Axiomatic and stochastic approaches to index number theory, W. Erwin Diewert.
    Chapter 18Economic approach, W. Erwin Diewert.
    Chapter 19Transfer prices, W. Erwin Diewert.
    Chapter 20Exports and imports from production and expenditure approaches and associated price indices using a simplified example and an artificial data set, W. Erwin Diewert.
    Chapter 21Elementary indices, W. Erwin Diewert and Mick Silver.
    Chapter 22Quality change and hedonics, Mick Silver and W. Erwin Diewert.
    Chapter 23Treatment of seasonal products, W. Erwin Diewert and Paul Armknecht.
    Chapter 24Measuring the effects of changes in the terms of trade, W. Erwin Diewert.
    GlossaryDavid Roberts (OECD) and Paul Schreyer (OECD).

    Bibliography

    The final copyediting and production of the Manual in the IMF External Relations Department were coordinated by Michael Harrup.

    Reader’s Guide

    International manuals in economic statistics have traditionally provided guidance about concepts, definitions, classifications, coverage, valuation, recording data, aggregation procedures, formulas, and so on. They have mainly aided compilers of the relevant statistics in individual countries. This Manual shares this same principal objective.

    The Manual will benefit users of export and import price indices (XMPIs), such as government and academic economists, financial experts, and other informed users. XMPIs are key statistics for policy purposes. They attract much attention from the media, governments, and the public in most countries. Both the export price index (XPI) and the import price index (MPI) are sophisticated concepts that draw on a great deal of economic and statistical theory and require complex data manipulation. This Manual is therefore also intended to promote greater understanding of the properties of XMPIs.

    In general, compilers and users of economic statistics must have a clear view of what the statistics measure, in principle. Measurement without theory is unacceptable in economics, as in other disciplines. This Manual therefore contains a thorough, comprehensive, and up-to-date survey of relevant economic and statistical theory. This makes the Manual self-contained in both the theory and practice of XMPI measurement.

    The Manual is, consequently, large. Because different readers may have different interests and priorities, it is not possible to devise a sequence of chapters that suits all. Indeed, users do not read international manuals from cover to cover in order. Manuals also serve as reference works. Many readers may have interest in only a selection of chapters. The purpose of this Reader’s Guide is to provide a map of the contents of the Manual that will aid readers with different interests and priorities.

    The XMPI Manual has a similar structure and similar material to that of the Consumer Price Index (CPI) Manual and Producer Price Index (PPI) Manual. The CPI, PPI, and XMPIs in large part have similar theoretical underpinnings and face similar practical problems in their compilation. There are of course important differences and each manual adapts the discussion of principles and practices to meet the needs of the index concerned. In particular the XMPI Manual has three new chapters: Chapter 2 on unit value indices, Chapter 19 on transfer pricing, and Chapter 24 on the measurement of terms of trade effects. All three manuals are self-contained.

    A. An Overview of the Sequence of Chapters

    As mentioned in the preface, the chapters of this Manual are arranged so that practical and operational issues (Chapters 114 and the Glossary) are supported by theoretical underpinnings (Chapters 1524). Specifically, the Manual is divided into four parts:

    Part I (Chapters 15) examines XMPI methodology, uses, and coverage;

    Part II (Chapters 612) covers compilation issues;

    Part III (Chapters 1314) considers operational matters; and

    Part IV (Chapters 1524) explores conceptual and theoretical issues.

    The remaining paragraphs in this section give synopses of the individual chapters.

    A.1 Part I: Methodology, uses, and coverage

    Chapter 1 is a general introduction to the theory and practice of XMPIs. It is intended for all readers. It provides the basic information needed to understand the later chapters and a summary of index number theory, as explained in much more detail in Chapters 1624. It then provides a summary of the main steps involved in compiling XMPIs, drawing on material in Chapters 410. It does not provide a summary of the Manual as whole nor does it cover specific topics or special cases that are not of general relevance.

    Chapter 2 starts with a strategic decision XMPI compilers must make: their reliance on unit value indices from customs data as surrogates for price indices. Chapter 3 outlines the history of price indices and how XMPIs have changed in response to the demand for broader measures of price change. Chapter 4 presents a few basic concepts, valuation principles, classifications, and the scope or coverage of an index. The scope of XMPIs can vary significantly from country to country.

    A.2 Part II: Compilation issues

    Chapters 510 form an interrelated sequence of chapters describing the various steps involved in compiling XMPIs, from collecting and processing the price data through calculating the final index. Chapter 5 discusses deriving the value weights attached to the price changes for different goods and services. Administrative data from customs authorities and establishment censuses or surveys, supplemented by data from other sources, typically provide the weight data.

    Chapter 6 deals with sampling issues. The approach of this manual to the collection of prices is to favor the use of surveys of establishments, as opposed to unit values from customs authorities, though issues relating to the use of unit value indices are outlined in Chapter 2. XMPIs are essentially estimates based on samples of the prices of commodities imported and exported by a sample of establishments. Chapter 6 considers sampling design and the pros and cons of random versus purposive sampling.

    Chapter 7 describes the procedures used to collect the prices from a selection of establishments and products. It deals with topics such as questionnaire design, specifying the transactions selected, and methods for collecting data, including the use of electronic media.

    Chapter 8 addresses the difficult question of how to adjust prices for changes over time in the quality of the goods or services selected. Changes in value owing to changes in quality count as changes in quantity, not price. Disentangling the effects of quality change poses serious theoretical and practical problems for compilers. Chapter 9 addresses two closely related questions: first, how to deal with goods and services that disappear from the sample; second, how new goods or services not previously traded can enter the sample.

    Chapter 10 gives a step-by-step description of editing procedures, calculating elementary price indices from the raw prices collected for small groups of products, and the resulting averaging of the elementary indices to obtain indices at various levels of aggregation up to the overall XMPIs. The chapter also provides a description of the process for the periodic update of the value weights.

    Chapter 11 deals with a few cases that need special treatment. It presents methods for handling examples of hard-to-measure goods and services, including agriculture, crude petroleum and gasoline, metals, computers, motor vehicles, clothing, airfreight, air passenger fares, crude oil tanker freight, ocean liner freight, and travel and tourism. The chapter concludes with a discussion of more general issues, including duties, currency conversion, and intra-company transfers. Chapter 12 provides an overview of the errors and biases to which XMPIs may be subject.

    A.3 Part III: Operational issues

    Chapter 13 deals with issues of organization and management. Conducting the price surveys and processing the results make for a massive operation that needs careful planning, organization, and efficient management. Chapter 14 addresses publication and dissemination standards for the XMPI results.

    A.4 Part IV: Conceptual and theoretical issues

    Chapter 15 marks a break in the sequence of chapters because it is not concerned with compiling XMPIs. Its purpose is to examine the place of XMPIs in the general system of price statistics. The measurement of series of the volume of GDP (expenditure) requires deflators of the nominal values of the GDP components that include exports and imports. It will be seen that a nonresident’s perspective is required in this regard—a perspective that identifies exports as a use by nonresidents and imports as a supply by nonresidents. However, the XMPIs for measuring changes in terms of trade, transmission of inflation via exports and imports, and productivity analysis requires a resident’s perspective that may be embedded in the production accounts of the 2008 System of National Accounts (2008 SNA). These approaches are outlined in Chapter 15, and their implications for theory and measurement are discussed in Chapters 4, 18, and 20.

    Chapters 1618 provide a systematic and detailed exposition of the index number theory underlying XMPIs. These chapters examine different approaches to index number theory. Collectively, they provide a comprehensive and up-to-date survey of index number theory, including recent methodological developments as reported in journals and conference proceedings.

    Chapter 16 provides an introduction to index number theory, focusing on breaking up value changes into their price and quantity components. Chapter 17 examines the axiomatic and stochastic approaches to XMPIs. The axiomatic, or test, approach lists many properties that are desirable for index numbers to have and tests specific formulas to see whether they have them.

    Chapter 18 explains the economic approach, using the economic theory of producer behavior for the XPI and consumer behavior for the MPI, to deriving both a theoretical XPI and a theoretical MPI, against which index numbers used in practice can be compared and biases identified. Although these economic indices cannot be calculated directly, a certain class of index numbers, known as “superlative” indices, can be expected to approximate them in practice. From an economic perspective, the ideal index for XMPI purposes should be a superlative index, such as the Fisher index. The Fisher index also is a very desirable index on axiomatic grounds.

    Chapter 19 considers the practical issue of transfer pricing between divisions of a multinational corporation that has establishments in more than one country. Tax differentials between countries may provide an incentive for the company to strategically price its international transactions to minimize the overall tax burden of the multinational corporation.

    Chapter 20 reconciles XMPIs from GDP production and expenditure approaches and presents a constructed data set to explain the numerical outcomes of using different index number formulas. It shows that the choice of index number formula can make a notable difference, but that different superlative indices approximate one another.

    Chapter 21 addresses the important question of what is theoretically the most appropriate elementary price index formula to use at the first stage of XMPI compilation if no information is available on quantities or values. This has been a comparatively neglected topic until recently, even though the choice of formula for an elementary index can have a significant impact on the overall XMPIs. The elementary indices are the basic building blocks used to construct higher-level XMPIs. Consideration is also given to the use of unit values as surrogates for prices at this first stage. Such unit values have the benefit of including information on quantities and, for strictly homogeneous commodities, benefit from time aggregation properties within the period they are reported, usually a month. However, unit value indices for prices of heterogeneous commodities, as is typical of data from customs authorities, are prone to bias. The stance of the Manual is to focus on prices of tightly defined commodities from establishment surveys at the elementary level.

    Chapters 22, 23, and 24 conclude the Manual. They address three conceptually difficult issues. Chapter 22 considers the theoretical issues of adjusting for quality change on the basis of the hedonic approach. Chapter 23 examines the treatment of seasonal products. Chapter 24 provides a framework for the analysis of the contribution of changes in a country’s terms of trade to changes in its real income.

    A glossary of terms and a bibliography appear at the end of the sequence of chapters.

    B. Alternative Reading Plans

    Different readers may have different needs and priorities. Readers interested mainly in compiling XMPIs may not wish to pursue all the finer points of the underlying economic and statistical theory. Conversely, readers more interested in the use of XMPIs for analytic or policy purposes may not be interested in the details of the conduct and management of price surveys. Not all readers will want to read the entire Manual, or even want to follow the same reading plan.

    However, all readers, whether users or compilers, will find it useful to read chapters 1 and 3. Chapter 1 provides a general introduction to the whole subject by providing a review of the XMPI theory and practice appearing in the Manual. It provides the basic knowledge needed for understanding later chapters. Chapter 3 explains the need for XMPIs and their uses.

    B.1 A compiler-oriented reading plan

    Chapters 2 and 514 are mainly for compilers. They follow a logical sequence that roughly matches the various stages of compiling XMPIs. They start with data sources for measuring price changes, unit value indices versus survey price indices, deriving the value weights and collecting the price data, and finish with publishing the final index. Chapter 13, on organization and management, is intended for both managers and compilers. It discusses many important issues on the structure and mechanisms that statistical offices need to monitor, control, and ensure the quality of XMPIs and to be efficient in the use of resources. Chapter 14 is on the effective dissemination of the results.

    Chapter 15 is for both compilers and users of XMPIs. It places XMPIs in perspective within the overall system of price indices.

    The remaining chapters, Chapters 1624, are mainly theoretical. Compilers may find it necessary to follow certain theoretical topics in greater depth, in which case they have immediate access to the relevant material. It would be desirable for compilers to acquaint themselves with at least the basic index number theory set out in Chapter 16 and the numerical example developed in Chapter 20. The material in Chapter 21 on elementary price indices is also important for compilers.

    B.2 A user-oriented reading plan

    Although all readers should find Chapters 14 useful, and Chapters 514 are mainly for compilers, several topics have aroused great interest among many users.

    Chapters 8 and 9 discuss the treatment of quality change, item substitution, and new products. Users may also find Chapter 10 helpful because it provides a concise description of the various stages of compiling XMPIs.

    Chapter 12, “Errors and Bias in XMPIs,” and Chapter 15, “The System of Price Statistics,” are also of interest to both users and compilers.

    Chapters 1624 cover the economic and statistical theory underlying XMPIs, and they are likely to be of interest to many users, especially professional economists and students of economics.

    C. A Note on the Bibliography

    In the past, international manuals on economic statistics have not usually provided references to the associated literature. It was not helpful to cite references when the literature was mostly confined to printed volumes, including academic journals or proceedings of conferences, found only in university or major libraries. Compilers working in many statistical offices were unlikely to have ready access to such literature. However, this has changed with the World Wide Web, which makes all such literature readily accessible. Therefore, this Manual, as was the case with the CPI Manual and PPI Manual, breaks with tradition by including a comprehensive bibliography to the large literature that exists on index number theory and practice that many readers are likely to find useful. In addition, websites are referenced that contain specialist papers on index number theory and practice, including those of the Ottawa Group and the Voorburg Group.

    The advent of computerized systems under the Automated System for Customs Data (ASYCUDA) project of United Nations Conference on Trade and Development (UNCTAD) makes this largely unproblematic.

    These problems are not ranked in order of importance; they all seem equally important.

    The reference to the 2008 SNA used in this Manual is to the final draft of Volume 1 (Chapters 117) of the updated System of National Accounts adopted by the thirty-ninth session of the United Nations Statistical Commission, February 26–29, 2008, available at: http://unstats.un.org/unsd/sna1993/draftingphase/ChapterList.asp.

    The Voorburg Group, which meets annually, has included the expansion of PPIs to services as part of its work program. The OECD, as part of its contribution to this program, conducts periodic surveys on the extension of PPIs in services activities. The latest survey results along with developments in services statistics are available at www.oecd.org/document/43/0,2340,en_2649_34355_2727403_1_1_1_1,00.html.

    At its thirty-second session, in March 2001, the United Nations Statistical Commission adopted the draft “Manual on Statistics of International Trade in Services” (United Nations, 2002). A revised version is planned for adoption in 2010.

    United Nations (1998a), and to assist in the implementation of the recommendations: United Nations (2004)—a draft supplement has been also prepared at the time of this writing (Statistical Paper, Series F, No. 87, Add. 1).

    Individuals with an asterisk (*) after their name served for only part of the period.

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