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HANDBOOK OF THE INTERNATIONAL COMPARISON PROGRAMME
- TASKS RELATED TO PRICE DATA
- Outline of price requirements
- Some principles of item selection
- Temporal and ICP price sampling
- Importance and identity
- Number of items per basic heading
- Obtaining national average annual prices
- Annual average prices
- National average prices
- With outlet price variation and quantity weights
- With outlet variation but without quantity weights
- TASKS RELATED TO PRICE DATA
A. Outline of Price requirements
- The quality of ICP comparisons depends heavily on the individual item prices
and the price parities at the basic heading level. This chapter is devoted
to the problems of country selection of representative items (specifications)
and the development of national average prices. The remainder of this section
outlines the general character of the sequence of item selection, price collection
and review of prices submitted by participating countries and discusses the
core commodities. Section B deals with some principles of selection of the
price sample by countries, and section C deals with the principles and practice
related to obtaining national annual averages for the price sample for the
ICP. The remaining parts of the price discussion are taken up in chapter
IV, which deals with special pricing problems as they occur for specific
categories of expenditure, while chapter V outlines how the price as well
as the expenditure data submitted by countries are then processed to generate
the ICP outputs.
- Selecting and pricing representative items constitutes the most difficult,
and typically quantitatively largest, most costly and time-consuming part
of ICP work for national statistical agencies and ICP organizers. The scenario
may differ from comparison to comparison; however, the main stages of this
work are the same in all comparisons. These are:
- Development of a list of representative items to be priced by a country;
this list will be based on important items that are common to the existing
national price data archives in the region or country group and draw on
the core commodities;
- Collection of the price data not readily available from regular surveys;
- Submission of the national average prices for the items selected to the
ICP organizers appropriate to the country;
- Checking the price ratios and parities at the basic heading level and
correcting any unsatisfactory basic data.
- The selection of the representative items to be priced should take place
before the reference period so that arrangements can be made for the inclusion
of additional price observations in national surveys, when necessary. Prices
collected for national statistical purposes, such as those used in the calculation
of consumer price indexes, can be used for ICP purposes. Indeed most of the
ICP specifications incorporate items collected in national price surveys
of participating countries. However, in most countries, some additional pricing
will be necessary. For national purposes, the items selected have to represent
goods and services that are comparable between time periods in the same country;
for ICP purposes, the selected items have to represent goods and services
that are comparable across countries. Thus, items that are important I/ in
a given country but that do not exist in any of the partner countries are
not useful for ICP purposes. On the other hand, items that are comparable
across countries but that are not in the sample of national price observations
may be very useful for ICP purposes. To sum up: when a country participates
in the ICP, it will need to enhance its national collection of price data
to obtain the necessary ICP price observations; and it will suggest for inclusion
in the ICP regional and core specifications some of the items it collects
for national purposes that are not currently in ICP core or regional lists.
The incorporation of ICP specifications into national statistical programmes
and the continual modification of the ICP specifications according to the
pricing experience of participating countries are strongly encouraged in
order to increase the overlap and up-to-date character of items priced for
national and international purposes.
- The way in which the ICP facilitates price collection is through its written
specifications, which describe the items that are suggested for pricing.
At the world level, there are specifications that have been found during
the various benchmarks to be items suitable for comparison across a number
of countries. In phase VI of the ICP a subgroup of these specifications has
been designated core commodities and they will serve as a basis for overlap
of price observations across the regional or group comparisons. Countries
in each region will be asked to include in their pricing as many of the core
commodities as possible that are available on their markets. Within each
regional group or other grouping of ICP countries there will be a set of
commodities that will include many items specific to the country group plus
most of the core commodities.
- The core commodity list is a list of goods and services that in the experience
of ICP countries, have been found to be common across large numbers of countries
in all regions of the world. It is necessary that some countries in all regions
provide enough prices from the core commodity list to provide coverage of
all the basic headings to permit linking of comparisons between each regional
or other grouping of ICP countries.
- As with items entering national time-to-time indexes, the core commodity
list will undergo changes as goods and services appear and disappear from
markets. One important role of the core commodity list is to provide a common
basis for the list of items to be priced in each region. Interactions between
country groups and the central ICP staff generate changes in the core commodity
list. Thus, it should be looked upon as a list of goods and services that
appear widely available in markets around the world, but a list that will
change as the economies of the world change.
- An example of a specification of a core commodity is a yellow onion:
Item code: |
Onion, yellow |
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Description: |
Common yellow dry cooking onions, globe in shape, all varieties.
About 5 cm in diameter. |
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Exclude: |
Bermuda, Spanish and green onions. |
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Unit: |
One kilogram. |
This specification is found in countries
in all regions of the world, and so it provides one natural bridge across
countries within a basic heading, vegetables. As will be discussed below,
even this item may raise questions in some countries that require special
treatment.
- An example of a specification that
would be important for East Asian countries in ESCAP is bean curd:
Item code: |
Bean
curds |
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Description: |
Curds from soy beans sold
moist. If purchased as package, 300-500 g. |
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Unit: |
One kilogram. |
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Specify: |
(1)
Sold in bulk
(2) Packaged |
Bean curds are a well-known item of
consumption, and while they are found in most countries of the world, they
have up to now not been widely enough consumed to be proposed as a core
commodity.
- These specifications illustrate some
of the detail involved in the 2,000 or more specifications that are part
of the ICP framework. In each of these specifications, the unit for which
the price is to be reported is indicated. Often, the price quotation is
for a different unit, as is the case for packaged bean curd where 300 to
500 g is the purchase size; in such cases, country statistical offices
must convert the price to a kg basis. Note also that in fact the ICP would
treat bean curds in bulk and in packages as two different items for building
up parities at the detailed heading level. These specifications have been
built up through the interaction of country price experts and regional
and world organizers of the ICP. By making these specifications available,
countries have the option of integrating the collection of ICP item prices
into their regular price collection.
- Typically, participating countries
are sent a draft list, built up from core specifications as well as items
thought appropriate for their region or country group, which they are asked
to review to determine:
- Which items in their existing database
they would be able to price exactly as proposed;
- Which items in their existing database
they would be able to price if some modification of the definition were
made;
- Which items they would not price
because they were not important in the consumption in the country;
- Which items might be added to the
draft list because they are important both in the country and probably
also in other participating countries;
- Which items are not in the existing
database but are important in the country and could be priced as additional
items.
- In drawing up their list, countries
will want to minimize the resources devoted to pricing additional items
under subparagraph (e) above, unless they are items that might usefully
be added as a substitute or totally new item to their existing price collection
for national purposes. In drawing up their lists, countries will therefore
want to take as many items from their existing database as possible, as
in subparagraphs (a) and (b) above, with one qualification. It is sometimes
the case that the existing database is not available in one place, as when
time-to-time price relatives are computed in different centres and the
records or price observations are scattered and not in machine-readable
form. In such cases, some additional pricing may require less resources
than recovering existing national prices. This qualification excepted,
countries should use their existing database as much as possible, including
urging that items under subparagraph (d) above be adopted for ICP purposes.
- Some trade-offs do exist between
items under subparagraphs (b) and (e) above. Suppose , for example, an
ICP specification calls for the price per kg of tomato sauce in tins of
200 to 250 g and the country specification is for tins of 500 g. The relationship
is usually not proportional, so one cannot simply give the price of a tin
of 250 g as half the price of a 500 g tin. However, if both size tins are
commonly purchased in a country, it is sufficient to modify the national
price for 500 g to a price for 250 g by the ratio of the prices of these
two sizes in a few outlets. Put another way, it would not be necessary
to take a price survey of tins of tomato sauce of 250 g and treat this
as a new item. Other specifications may be less clear-cut and countries
should raise questions about them when they submit their proposed price
list to the regional coordinators.
- The next step may be a regional workshop
at which price experts review the list with a regional coordinator to resolve
questions of commodity and service definitions and to agree on a final
list. Sometimes a price expert will visit a country to draw up the final
list. In either case, it is often necessary to visit stores, examine samples
or review catalogues in order to settle on an operating version of the
list of specifications for which the country will supply prices.
- After a final sample of items is
agreed upon, national statistical offices then have to collect the data
and determine the national average prices for the items selected for submission
to the organizers. It is neither necessary nor desirable for multilateral
comparisons that countries price all items on the list; nevertheless, to
obtain reliable PPPs at the GDP level, a relatively large number of average
prices (several hundred, at least) have to be provided. While submission
of the average prices can take place only after the reference period is
over, arrangements for the necessary additional price observations are
most conveniently begun much earlier, preferably before the reference period.
- The third stage consists of a review
of the submitted prices by the organizers of the country groups to check
for possible errors and to make requests for supplementary data as required.
Often errors arise because prices are provided for a different unit than
called for in the specification; this quickly becomes apparent when price
ratios of items are examined for a number of countries. At the next stage,
a preliminary set of basic heading' parities is reviewed by the organizers,
often in consultation with the participating countries in a region. This
review of basic heading parities makes it easier to discover possible errors
in the item prices ranging from simple clerical mistakes to misinterpretation
of the item descriptions or units of measurement.
B. Some Principles
of item selection
1. Temporal and
ICP Price sampling
- The item specifications entering
into the calculations of parities at the basic heading level serve the
same function as the price representatives in the building up of national
temporal price indexes, such as the consumer price index, from category
price changes. Of course, the dimensions of the comparisons are different
in the two cases. It is space (country-to-country) in the case of the PPPS,
and time (period-to-period) in the case of the national price indexes.
- In their time-to-time indexes, most
countries compute the ratio of prices in two time periods and take an arithmetic
average of the ratios across outlets (APR); or less frequently, countries
compute the arithmetic average of prices of comparable items across outlets
in two time periods and then take their ratio (RAP) as the measure of price
change. 5/ When ratios of average prices (RAP) are the practice, it is
clearly the aim to compare the price of identical products in each period
at the same outlet, as in the ICP. Whether the time-to-time price relatives
are computed at each outlet, and the relatives are weighted across outlets
(APR), or prices for identical specifications are averaged across outlets
and a price relative calculated (RAP), usually implicit or explicit weights
are used at the outlet level. I/ When the price change for an item has
been calculated, these are then combined across items using some weights.
- However, an item in time-to-time
indexes is unlikely to have its own weight. Countries often have quantity
weights at a level of detail, such as tinned vegetables, but they are unlikely
to have total quantity within countries for a detailed specification, such
as a 500 g can of peas. In time-to-time indexes, the weight assigned to
the price change of tinned peas is likely to be the whole weight of tinned
vegetables. The assumption that changes over time in the price of peas
represent price movements of tinned vegetables is basic to price index
construction.
- The analogous assumption for place-to-place
comparisons is that items chosen for a heading represent the price structure
of the country for that heading. Thus far, the ICP has not developed a
sampling frame to spell out exactly how this selection should be done.
The aim is clearly to select items in all of the countries that appropriately
represent the prices of goods consumed in each country in that basic heading.
By using the term important to describe items, it is recognized that certain
criteria for item selection exist, but that there is not yet a sampling
design that allows guidance as to what are truly representative items.
1/
- Where countries average ratios of
price changes (APR), their task of matching specifications across outlets
(space) is substantially reduced and, as will be discussed in chapter IV,
the methods developed in these countries may provide some guidance for
future ICP work. Because APR countries need not average prices across outlets,
more supplementary price collection, or additional processing of existing
surveys, will be necessary for these countries, because average prices
of individual items are not an intermediate output of the time-to-time
price estimation procedure.
- Where countries follow the RAP approach,
there will be a number of (national) average prices available from regular
surveys that can be used directly or perhaps with some modification for
size of purchase, or other feature, for the ICP. One reason that countries
compute average prices and then take ratios is that the average prices
are of interest in themselves. Countries participating in the ICP will
as a part of their work generate a large sample of average prices that
may prove useful for other purposes.
- One major difference in the spatial
comparisons is that the number of potential items in a time-to-time index
remains relatively stable from year to year, which is not true across countries.
Consider the fact that supermarkets in the United States carry from 10,000
to 20,000 items and brands, while in many countries the number would be
under 1,000. This means that single specifications are likely to be a smaller
percentage of the total expenditures in a detailed heading in more affluent
countries and that sampling becomes a necessity. However, countries with
relatively small numbers of items in their markets may still have a significant
number of items that are not common to more affluent countries. In choosing
what items to match across countries, the ICP has been guided by two basic
principles of item selection, which are now discussed.
2. Importance and
identity
- One principle of item selection that
has been generally accepted, if not precisely defined, is that specifications
priced by a given country should be sufficiently typical (characteristic)
for the country. Pricing uncharacteristic items (i.e., goods or services
which, though they exist in a given country, are not important in expenditure
budgets and/or are not widely available in outlets for such items), is
to be avoided. I/ Items not commonly consumed may have very high prices
(and, just because they are so high, the given product is purchased in
a very small quantity, thus, it is uncharacteristic) and can be judged
as not important to price.
- The principle of choosing important
products often comes into conflict with the second principle of choosing
identical products. This is perhaps the most important issue in price selection.
Often a specification can be associated with a brand name so that identity
of product can be assumed (in fact, even this need not be the case as firms
frequently assign the same model number to items that are either technically
different between countries or are produced under the same name in different
locations with some modifications for different markets). However, if a
brand name is found in a country but is not commonly consumed, then it
may poorly represent that basic heading. This conflict between how identical
and how important is a product will be less important in a homogeneous
group of countries, such as the EC, where brand names can be part of the
specification. However, when comparisons are made for core commodities
throughout the world, it is often necessary to trade off identity to make
sure that items are characteristic of the purchases of a country in a basic
heading.
- In the above discussion, identity
of items was spoken of in terms of brand name, but there is more to comparing
like with like than just trademarks. The principle of comparing identical
items means that there should be no differences in either the quantity
or the quality of the specifications selected among countries that significantly
influence the use of the given good or service. In particular, identity
means that:
- The size of the good/service should
be the same. As mentioned above, this requirement has a double meaning:
the unit price reported not only relates to the same size (e.g., the
price of 1 kg of potatoes), but the price originally observed should
also relate to approximately the same purchased quantity in each country.
It would not be appropriate, for instance, to observe the price of sugar
in a 1 kg package in country A while observing it in a 10 kg package
(and dividing it by 10) in country B, since the price of a larger size
package covers relatively less distributive services (per kg) and is,
typically, relatively lower;
- The physical and functional properties
should be the same (for instance, the thread count of fabrics, the capacity
of machines, the life of electric bulbs). This relates to all such properties
that may have significant influence on the price of the given product.
Shape and colour may also be relevant for some products, although not
for others;
- Types of outlet should ideally
be the same when matching items across countries (this is one of the
more important conditions that are discussed further in the following
section);
- Delivery conditions (e.g., package,
warranty, transportation cost included or excluded) should also be the
same. This is particularly important for producer and consumer durables;
- Other circumstantial factors (e.g.,
type of restaurants for consumption of specified dishes, access to repair
services) should be the same in so far as they have a significant effect
on the price. The set of characteristics that seem relevant are decided
upon in the construction of item specifications. In principle, characteristics
not listed in a specification are considered to have no influence on
the price of an item.
- How does a country try to balance
these criteria? First, those items that a country has in its own database
are, in ICP terms, important for the country. If these items match, or
can be simply modified to meet ICP specifications, they should certainly
be chosen as items for which the country will supply prices. When should
a country substitute an identical product that is not a regular part of
a country's national price collection for a comparable item for which prices
are regularly collected? A necessary condition for substitution is that
the identical item is well known and widely available and consumed in a
country, where widely can mean all over a country, or in many different
outlets even if concentrated in urban areas. If this condition is met,
then a country should substitute the identical product when there is reasonable
doubt about whether the items are in fact comparable.
- A corollary of the above is that
a country should not substitute a brand-named item that may in some cases
be mentioned for illustrative purposes in some ICP specifications simply
because it is known to be consumed in the country. Unless the item is widely
available and widely consumed, it should not be substituted. What about
the case where a brand-named item is consumed in a few places in the country
but there is either no item priced in the country that meets the specification
or there is considerable uncertainty about whether the specification in
the country matches the ICP specification. In general, the brand-named
item should not be priced. Secondly, if there are doubts about whether
an item priced for national purposes matches the ICP specification, either
the item should not be proposed for pricing or the question should be raised
with the regional coordinators.
3. Number of items
Per basic heading
- Identity and importance are principles
with respect to specifications of individual items. In addition, it may
take more items to represent one basic heading than another. In relatively
homogeneous basic headings, a low number of specifications - even one specification
- may sufficiently capture the price structure of the basic heading. For
instance, in the basic heading Eggs (1.1.1.04.5), which in many regions
consists overwhelmingly of chicken eggs, one single specification may sufficiently
represent the heading, though weight or size will still need to be specified.
- In a heterogeneous basic heading,
such as Glassware, tableware and household utensils (1.4.4.01.0), consisting
of thousands of different items and brands, a large number of specifications
may be needed. The ICP has offered over 40 generic specifications for this
basic heading, because it is so diverse. To be more precise, the homogeneity
or heterogeneity of basic headings should be judged not so much in terms
of number of items but in terms of their relation to the individual price
ratios. If the dispersion of price ratios is small, only a few specifications
may be necessary even when it appears that the basic heading is quite heterogeneous
in terms of number of distinguishable items. Where price ratios have substantial
dispersion, a larger number of specifications is needed.
- In most country groups, the number
of items suggested per specification differs from basic heading to basic
heading. These differences have developed as experience has been gained
about those headings where there is more dispersion in the price ratios.
9/
C. Obtaining national
average annual Prices
- The ICP seeks national annual average
prices for items because these are in principle the prices that should
be embedded in the national accounts. National expenditures on items at
the basic heading level are represented by the sum of the values of all
the different transactions occurring throughout the year on the items over
the whole country in a basic heading. The annual national average price
when divided into the expenditure on a given item should be the unit value
that gives the quantity of the item purchased in the country during a year.
The annual average question will be treated first, and then the more interesting
question of how to obtain national average prices will be discussed.
1. Annual average
Prices
- In many countries, it is normal to
compute annual average prices for many food items, especially those with
seasonal price variations, but this is not common for other items. In practice,
where it is not a heavy computational burden, countries have averaged monthly
observations of prices regularly collected for other price purposes. Same
countries, that have monthly data, have reduced computations by using an
average of, say, April and September prices to approximate an annual average
for non-seasonal items. Countries experiencing high rates of inflation,
or erratic patterns of price change during a year, may find other methods
more appropriate.
- An alternative that has been used
in many participating countries is to choose a month for ICP prices, say
October, and then move these prices to annual average prices. For example,
if the ratio of October prices in the consumer price index to calendar
year annual prices in 1993 for footwear is 1.02, then each item price for
footwear referring to October would be divided by 1.02 to obtain the estimated
annual price.
- The above discussion takes the annual
average to be for a calendar year, which is the norm for the ICP. As discussed
in chapter II, a number of countries do not estimate their national accounts
on a calendar year basis. Usually, these countries provide the ICP with
adjusted calendar year expenditures. It is clearly important that both
the national accounts and price observations refer to a calendar year.
2. National average
prices
- There are three sets of prices used
in PPP calculations; (a) national prices that are part of those regularly
collected by the statistical agencies, (b) prices specially collected for
the ICP, and (c) normalized prices. Because normalized prices are generated
in a way that makes them national average prices, most of the discussion
of this section deals with the first two sets of prices.
- Normalized prices may be estimated
by hedonic regression methods, as in the case of house rents, motor vehicles
and other large, complex and expensive pieces of equipment; or normalized
prices may be calculated on the basis of pre-defined cost estimates, as
in the case of construction projects and buildings. A normalized price
is usually constructed as a national average price. Some specially collected
prices, such as postal rates, are, by definition, national prices, while
many machinery prices are national because there are only a few distributors.
- However, for a large number of consumer
items, prices vary greatly by outlet and region and between rural and urban
areas. In contrast to the measurement of time-to-time price changes, where
the necessity for absolutely identical items to be priced nationwide is
not pressing, the ICP makes more rigorous demands on comparability of specifications
across observations within a country. In consumer price indexes, for example, "like
with like'' comparisons over time for a well specified item are based on
a process of averaging price relatives, and there is no need to ensure
that the products priced in different shops or outlets, and in various
parts of the country, are identical. Indeed, in order to better represent
time-to-time price changes, the items included in an index in different
regions should be more characteristic of local expenditure patterns, including
point of purchase. But for ICP purposes, the items - and the qualities
they reflect - should be as similar as possible for a proper comparison
to be made.
a. With outlet
Price variation and quantity weights
- For many purposes, the ICP has adopted
the potato-is-a-potato principle that says if an identical product is sold
in a variety of markets, the ICP will treat it as the same. This means
that the national average price of potatoes will include prices from village
markets as well as specialty grocers. The reasoning here is that the utility
derived from consuming a potato is the same whether it is purchased from
a roadside stall or a supermarket. To the extent that less service is involved
in the sale of potatoes in less affluent countries, this principle leads
to lower prices, other things being equal, for potatoes in poorer countries.
This principle seems to make sense for many commodities, but it certainly
is not acceptable for services, so that for say a cheese sandwich to be
eaten away from home, the outlet has always been an essential part of the
ICP specification. Again, the reasoning on the cheese sandwich is that
the consumer's utility depends upon the whole eating out experience, so
that whether the sandwich is purchased in a roadside stall, a diner or
a full service restaurant clearly needs to be part of the specification.
- At present, the state of the ICP
country practice in calculating national average prices varies substantially.
The example below illustrates a number of issues in the construction of
national average prices and discusses some approximations that have been
made by individual participating countries in obtaining estimates of their
average item prices. The example also makes clear why the problem is part
of a more general concern for how the core and other specifications of
the ICP continue to evolve in each region and across regions.
- In the example, suppose prices for "'Irish'
potatoes, white or red skinned", are collected from each of a broad cross-section
of different outlets in countries A and B. In addition to the average price
for each type of outlet, the quantities, which are not normally known,
are provided.
Outlet |
Price
in A |
O in
A |
Price
in B |
O in
B |
Pb/Pa |
|
(1) |
(2) |
(3) |
(4) |
(5) |
Urban speciality |
1.00 |
10 |
60 |
5 |
60 |
Supermarket |
0.80 |
60 |
50 |
10 |
62.5 |
Urban market |
0.60 |
10 |
45 |
20 |
75 |
Hawker/vendor |
0.50 |
10 |
45 |
10 |
90 |
Rural market |
0.40 |
10 |
40 |
55 |
100 |
Quantity weight national average |
0.73 |
|
43.5 |
|
59.6 |
Geometric mean unweighted |
0.6258 |
|
47.547 |
|
75.974 |
- In the example, the prices differ
across outlets in good part because urban distributors must bear costs,
such as transport and taxes, that are an intermediate product. Some of
the price difference may be a service element that urban consumers purchase
when they go to a supermarket or specialty shop. The average price in each
country is computed in two ways, first as a quantity weighted average and
second as an unweighted geometric mean. The weighted average price is 0.73
in A and 43.5 in B and the ratio of these averages is 59.6. In this particular
example, the ratios of the prices at any of the particular outlets as given
in column (5) are all greater than the ratio of the average prices. This
may be interpreted to mean that in country A the potato is typically bought
in supermarkets and in country B typically in rural markets so that a ratio
of the average prices is close to 50 (= 40/0.80, the ratio of rural markets
in B to supermarkets in A).
- Total expenditures in national currencies
in A are 73 and in B 4,350.If A is an affluent country and B a poor country,
then this example illustrates why the potato-is-a-potato principle, because
of the larger amount of intermediate product and customer amenities entering
into commodity sales, tends to make some price comparisons lower in low-income
countries. 10/ The comparison based on national average prices does correctly
reflect the unit cost of resources involved in each country in getting
a kg of potatoes to consumers. Another advantage of the national average
price calculation is that it produces the quantity of potatoes consumed
in each country when expenditures are divided by average prices. That is,
the quantity in A is equal to that in B, namely, 100. If we divide the
expenditure ratio of 4,350/73 = 59.6 by the ratio of average prices of
59.6, we of course get the same result, that each country consumes the
same quantity of potatoes.
- This last point can be illustrated
in another way. Consider an arithmetic weighted average of the price ratios.
Using country A's quantities, the average of the price in B to that in
A is 66.25, and using country B's quantities, the average is 88.25. The
Fisher or geometric mean is 76.5. If we now make a quantity comparison
between A and B, B will be only 0.78 of the consumption of A. One can interpret
this result as saying that, given the outlet, the resources devoted to
potato production and distribution in B is only 78 per cent of that in
A. Clearly, averaging ratios of outlet prices and comparing the ratios
of prices averaged over outlets both have advantages and disadvantages.
However, one point is clear, the closer two countries are with respect
to the distribution of sales by type of outlet, the less difference it
makes which approach is followed.
- Another point mentioned earlier that
is illustrated in the example is that, though it is not a theoretical advantage,
there is a convenient feature involved in using the geometric mean if weights
are not known. The last row in the example gives the geometric mean of
the prices in each country. The practical advantage of the geometric mean
is that the last entry, 75.974, is the geometric mean of the price ratios
in each outlet, as well as the ratio of the geometric mean of the prices
across outlets in countries A and B.
b. With outlet
variation but without quantity-weights
- There frequently are large rural-urban
and regional differences in food, services and some other prices. It is
therefore particularly important that these differences be captured in
the national average price. Often, this may be done on a sample basis,
so that a rural-urban price factor can be developed by type of item. For
example, usually the rural price for cereals is only slightly lower than
the urban price, while for fruits, vegetables and meats, the difference
may be 50 per cent or more. The EC countries have developed such factors
that allow them to go from capital city to national prices without making
special collections of ICP items throughout their countries. Many ICP countries
have found that a small pilot survey was adequate to find out the appropriate
factors to adjust urban prices to national prices for foods and other expenditure
groups.
- Reality differs from the example
above in at least one important respect, namely, that quantities are not
generally known. This means that there is uncertainty about how one calculates
a national average price or how one averages price ratios. What is the
implication of this for country procedure? There is some information on
this question for several industrialized countries.
- Recent price inquiries undertaken
in major cities for the purposes of international salary determination
clearly show that in some cases the variation in prices for the same product
within a given city are even greater (when converted at official exchange
rates) than the difference in the average prices for the same item between
several of the cities involved in the international comparison. This tendency
was also observed in the OECD special direct "three-city" pairwise comparisons
carried out for both the United States of America and Canada in their 1980
phase IV survey. 11/ This implies that outlet-specific as well as product-specific
pricing may need to be followed to obtain the most robust form of item
price matching. Consider the following example, which differs from the
potato example in that the quantities are not given, but two regions of
each country are represented.
- For purposes of this illustration,
suppose the item is a pair of training sneakers of a major world manufacturer,
such as Adidas or Nike, and the price data are as follows:
|
Country
A |
Country
B |
|
Outlet |
Price
in region |
P2/P1 |
Price
in region |
P2/P1 |
Pb/Pa |
|
(a) |
(b) |
|
(a) |
(b) |
|
|
|
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
Urban specialty |
60 |
55 |
0.92 |
350 |
400 |
1.14 |
6.52 |
Department store |
40 |
40 |
1.00 |
250 |
300 |
1.20 |
6.88 |
Urban market |
35 |
35 |
1.00 |
220 |
250 |
1.14 |
6.71 |
Hawker/vendor |
30 |
25 |
0.83 |
200 |
190 |
0.95 |
7.09 |
Rural market |
35 |
30 |
0.86 |
230 |
220 |
0.96 |
6.92 |
Simple arithmetic average |
40 |
37 |
|
250 |
272 |
|
|
Geometric average |
38.82 |
35.67 |
|
245.15 |
262.82 |
|
6.821 |
In this example, the variation across
outlets in each country within each region is substantial. Columns (3)
and (6) give the ratio of the price in each region for a given outlet.
Prices vary across outlets in each country and region by at least 75 per
cent, which is much more than the variation across region in either country.
- Another way of illustrating this
point is provided in column (7), where the ratio of average price by outlet
in each region is given between countries B and A. For example, the simple
average price in the rural market in A is 32.5 and in B 225, and the ratio
is 6.92 (= 225/32.5). The variation in column (7) is quite small, intentionally
reflecting the type of empirical finding commented upon in paragraph 120
above. If the ratio of the geometric mean of the prices in each country
for each type of outlet were taken, the corresponding entries would also
display little variation across outlets. The last row of the example again
illustrates an advantage of the geometric mean; the last entry, 6.8il,
is the geometric average of the ratios of the geometric mean of the prices
for each type of outlet as well as the ratio of the geometric average of
the geometric mean of the prices across outlets in each region.
- As a rough generalization, differences
in prices between regions and between rural and urban prices within a region
and a country can be treated as differences owing to intermediate product,
mainly transportation and handling. This is graphically illustrated in
the case of the United States, which in the phase I comparisons had the
highest prices of any country for tomatoes and the lowest price for canned
tomato sauce. Tomatoes were cheap where they were grown and canned, but
very expensive to deliver to urban outlets. The potato-is-a-potato principle
can be safely applied for rural-urban and region-to-region price differences.
- However, outlet price variation within
urban areas may be due to a significant element of difference in the final
service to the consumer in purchasing an item across outlets. Consider
the size of error that might occur if countries A and B priced the item
in only one of the first three outlets. This might occur, for example,
if there was no information on quantities sold by type of outlet. Three
of the nine possibilities are given in the first three rows of column (7)
and the other six have been calculated using the average price of each
outlet type across the region. The combinations are:
Ratio of price
in country B to price in country A
|
Country
B's price from |
|
Urban
specialty |
Department
store |
Urban
market |
|
(1) |
(2) |
(3) |
Country A's Price from |
Urban specialty |
6.52 |
4.78 |
4.09 |
Department store |
9.38 |
6.88 |
5.88 |
Urban market |
10.71 |
7.86 |
6.71 |
One point of this example is that,
if there is not much information about quantities purchased by outlets,
then the result will be subject to much less error if outlet is held constant.
That is, the diagonal elements have much less variation than the off-diagonal
elements.
- This example also makes clear that,
if weights are not known, it may be even more important to devote resources
to holding outlet type constant than to determining regional differences
in prices. This can be done, for example, by a small survey that generates
estimates of the difference in price by outlet for several varieties of
consumer purchases. 12/
- The more likely situation is that
countries do have some information about the importance of outlets and
can say one outlet type is more likely to be the volume seller of a particular
item. In this case, countries should be guided by the three considerations
developed in this section: (a) ensuring that price quotations from important
outlets receive more weight in any national average price; (b) treating
rural-urban and regional differences in prices according to the potato-is-a-potato
principle, averaging their prices by quantities sold; and (c) whenever
outlet types within urban areas can be made part of a specification, this
should be pursued in collaboration with other participating countries.
4/ An item is important in a country
if it is commonly purchased or, at least, well known and easily available
in a number of outlets. While expenditures on an item are a necessary condition
for it to be important, it is not a sufficient condition. Items that represent
a significant proportion, say 10 per cent, of expenditures within a basic
heading, are important as used here. However, there are many items that may
not have large expenditure shares within the basic heading, but are important
according to the criteria of familiarity and availability.
5/ In time-to-time indexes, weights
for individual price representatives are not known, nor is country practice
consistent in the method used to estimate price changes from individual price
observations at the outlet level. The International Labour Office(ILO, 1989,
p. 88) has discussed the problem in detail and concluded that there is one
practical advantage case for use of the geometric mean in averaging either
price ratios or item prices, namely, the geometric mean of price ratios across
outlets is equal to the ratio of the geometric mean of average of prices
across outlets. As will be discussed below and in chapter V, there are several
points in processing ICP data where a choice between arithmetic and geometric
means is required, including the basic heading level, where the ICP has usually
worked with the geometric mean.
6/ In time-to-time indexes, the weights
assigned to each price observation are usually known. The price sample may
be self-weighted, or there may be specific outlet weights. Usually, countries
implicitly use the same weighting when ICP prices are averaged across outlets.
7/ One criterion of importance that
was discussed earlier was expenditure. However, as explained in chapter II,
the basic heading level is a level of aggregation below which weights are
not generally available by item. Usually, some information on expenditure
weights is known within the basic heading that can be used as a guide to
item selection. As discussed in chapter V, some country groups have developed
the practice of indicating more important items (where more means larger
expenditure weight) in a basic heading by an asterisk (*) and to later use
this information in a rough weighting system.
8/ The term "characteristicity" was
coined by L. Drechsler (1973). In the text, this term is included as part
of the importance of an item.
9/ It should be mentioned that EUROSTAT
has developed a different methodology with respect to item selection that
emphasizes making the so-called "best" selection of items between each possible
pair of EC countries. This procedure is not further discussed here because
it has not been thought feasible to pursue it for other country groupings
and because it has been fully described by EUROSTAT (1987).
10/ This point has been extensively
investigated in Daniel Usher, The Meaning of National Income Statistics (Oxford,
Oxford University Press, 1974).
11/ Seattle and Vancouver, Chicago and
Toronto and New York and Montreal. These cities represent a substantial proportion
of the urban populations of the two countries.
12/ The logical extension of the arguments
presented here is that specifications should match item by outlet, with less
concern with the measurement of national average prices per se. (In this
respect, the philosophy of the approach is similar to that adopted in time
series analysis by the United States Bureau of Labor Statistics in its 1978
Revision of the United States Consumer Price Index in deciding to go for
outlet-specific price matching.) Its validity rests on the assumption that
differences in price ratios of products found in different locations will
be much smaller than the actual differences in prices. By selecting one or
two clearly specified and identifiable price ratios for each commodity, substitutability
and certain general features of economic relationships will ensure that ratios
will be broadly representative of the average price level ratio, i.e., the "parity''
for the overall "group". Similar assumptions are made in a conventional price
index when only one or two items are selected to represent general changes
in prices of the broad category of commodities to which they belong. In the
absence of weights at the item-outlet level, some compromise as suggested
in the text is necessary.
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