17 march 2010 eclac, santiago workshop on manufacturing statistics for eclac member states slide 1...

17 March 2010 ECLAC, Santiago

Workshop on Manufacturing Statistics for ECLAC member states

Slide 1 of 89

Index number construction and new Index number construction and new variable derivationvariable derivation

United Nations Statistics Division (UNSD)United Nations Statistics Division (UNSD)


Slide 2 of 89Workshop on Manufacturing Statistics

for ECLAC member states

Overview Overview

Index numbers: basic theoryIndex numbers: basic theory

International recommendation for the Index of Industrial Production International recommendation for the Index of Industrial Production (IIP)(IIP)

Key recommendations in constructing IIPKey recommendations in constructing IIP

Other specific issues (only discuss if there is time)Other specific issues (only discuss if there is time) Reweight, linking and referencing the seriesReweight, linking and referencing the series Two main concepts in calculating the Index of Industrial Two main concepts in calculating the Index of Industrial

Production (IIP)Production (IIP)

Composite IndexComposite Index




Index number: why?Index number: why? Why index number?Why index number?

Concern with Concern with aggregation problemsaggregation problems, over , over goods and goods and servicesservices, , timetime and and spacespace. .

• How exactly should the microeconomic information involving possibly millions of prices and quantities be aggregated into a smaller number of price and quantity variables?

Allow Allow comparisoncomparison of prices and quantities for of prices and quantities for a a common group of items common group of items

• between different space such as geographical region between different space such as geographical region (spatial index)(spatial index)

• at two point of time (temporal index)at two point of time (temporal index)




Notations used in this Notations used in this presentationpresentation

Notations for Notations for temporaltemporal index index ppt : t : pricesprices (of a vector of commodities) at time (of a vector of commodities) at time tt

qqt :t : real quantities purchasereal quantities purchase (of a vector of commodities) (of a vector of commodities)

at time at time tt Suppose 2 periodsSuppose 2 periods

• Base periodBase period: t=0: t=0

• Current periodCurrent period: t=1: t=1 (Notice: We are not looking at spatial dimension in this (Notice: We are not looking at spatial dimension in this

presentation)presentation)




Index number problemIndex number problem Index number problem:Index number problem:

Find a Find a price index price index P(pP(p0 0 ,p,p1 1 , q, q0 0 ,q,q11),), and and a a volume (quantity) index volume (quantity) index Q(pQ(p0 0 ,p,p1 1 , q, q0 0 ,q,q11)) such that such that

i.e. To decompose a value ratio between 2 periods into 2 components overall change in prices between the two periods,

• i.e. price index price index P(pP(p0 0 ,p,p1 1 , q, q0 0 ,q,q11)) overall change in quantities between the two periods,

• i.e. volume (quantity) index volume (quantity) index Q(pQ(p0 0 ,p,p1 1 , q, q0 0 ,q,q11))

00

1110101010 '

'),,,(),,,(

qp

qpqqppQqqppP




Examples of Price/Volume Examples of Price/Volume Indices in Official StatisticsIndices in Official Statistics

Price indicesPrice indices Consumer Price Index (CPI), Producer Price Index Consumer Price Index (CPI), Producer Price Index

(PPI), Spatial Price Index, etc.(PPI), Spatial Price Index, etc. Volume (Quantity) indicesVolume (Quantity) indices

Index of Industrial Production (IIP), Index of Services, Index of Industrial Production (IIP), Index of Services, Retail Sales Index, etc.Retail Sales Index, etc.

Our focus is on Our focus is on volume indicesvolume indices




Examples: Examples: Index of Industrial ProductionIndex of Industrial Production

(Base year 2005=100)(Base year 2005=100)

SingaporeSingapore United StatesUnited States

20052005 100100 100100

20062006 110.3110.3 102.4102.4

Are the following statements correct?Are the following statements correct? The industrial production of Singapore is larger in 2006 The industrial production of Singapore is larger in 2006

than in 2005. than in 2005. The industrial production of United States is larger in The industrial production of United States is larger in

2006 than in 2005.2006 than in 2005. In 2006, the industrial production for Singapore is In 2006, the industrial production for Singapore is

larger than United States.larger than United States.




Two types of comparisonTwo types of comparison Comparison of prices/quantities can occur between:Comparison of prices/quantities can occur between:

different regionsdifferent regions at at a given timea given time ( (spatial indexspatial index))• China compared to India, New York compared to Hong KongChina compared to India, New York compared to Hong Kong

two points in timetwo points in time at at a given spacea given space ( (temporal indextemporal index))• 2010 compared to 2009, Jan compared to Feb2010 compared to 2009, Jan compared to Feb

Two separate but important conceptsTwo separate but important concepts Difference in quantities across regionsDifference in quantities across regions v.s. v.s. Change in quantities Change in quantities

over timeover time But, you cannot use temporal index to compare between countries But, you cannot use temporal index to compare between countries

at a given time, or use spatial index to compare change over timeat a given time, or use spatial index to compare change over time• You cannot use IIP to compare industrial production across You cannot use IIP to compare industrial production across

countries. countries. • You cannot use spatial price index to measure inflation. You cannot use spatial price index to measure inflation.




Summary so farSummary so far Index number problemIndex number problem

Concern with Concern with aggregation problemsaggregation problems, over goods and services, time , over goods and services, time and space. and space.

Allow Allow comparisoncomparison of prices and quantities for a common group of of prices and quantities for a common group of items items

Decompose Decompose value changevalue change into into price changeprice change and and volume (quantity) volume (quantity) changechange

Two type of comparisonsTwo type of comparisons TemporalTemporal

• Difference in prices/quantities over time, at a given spaceDifference in prices/quantities over time, at a given space SpatialSpatial

• Difference in prices/quantities across regions, at a given time.Difference in prices/quantities across regions, at a given time. Our focus is on volume (quantity) indices that compare quantity across Our focus is on volume (quantity) indices that compare quantity across

time.time.




Volume indices - OverviewVolume indices - Overview

Measuring volume change of a fixed basket over Measuring volume change of a fixed basket over timetime

Practical calculation of volume indicesPractical calculation of volume indices Laspeyres and Paasche indicesLaspeyres and Paasche indices

Volume indices for 3 or more periodsVolume indices for 3 or more periods Direct vs Indirect indicesDirect vs Indirect indices




Fixed Basket ApproachFixed Basket Approach

the term the term FixedFixed means two thingsmeans two things The The typetype of goods and services remains the same from of goods and services remains the same from

period to periodperiod to period The The priceprice of goods and services remains the same from of goods and services remains the same from

period to period for period to period for volume indexvolume index The term The term BasketBasket represents the actual goods and services represents the actual goods and services

included in the index, together with their priceincluded in the index, together with their price




Fixed Basket Volume IndicesFixed Basket Volume Indices Procedure to calculate the fixed basket volume indicesProcedure to calculate the fixed basket volume indices

Obtain the quantity for each product in the basket from the Obtain the quantity for each product in the basket from the reference periodreference period

Take the Take the fixed pricefixed price of each product in the basket of each product in the basket Determine the value of the basket using Determine the value of the basket using

• fixed prices and fixed prices and • quantities from the reference periodquantities from the reference period

For each successive period, determine the value of the basket For each successive period, determine the value of the basket usingusing

• fixed prices fixed prices • quantities from that periodquantities from that period

At At eacheach period, the volume index is the ratio of the value of the period, the volume index is the ratio of the value of the basket to the value of the basket from the reference period basket to the value of the basket from the reference period (multiplied by 100)(multiplied by 100)




Fixed price, bilateral volume Fixed price, bilateral volume indicesindices

Comparison of volume from two periodsComparison of volume from two periods Fixed prices, Fixed prices, HOWHOW to choose? to choose?

Earlier periodEarlier period??• Using prices in the first period the index measures Using prices in the first period the index measures

volume change from the perspective of the market volume change from the perspective of the market situation prevailing in that periodsituation prevailing in that period

• LaspreyresLaspreyres Index Index Later periodLater period??

• Conversely, choosing to fix the prices at the latest Conversely, choosing to fix the prices at the latest period will result in the index measuring volume period will result in the index measuring volume change from the perspective of the latest periodchange from the perspective of the latest period

• PasschePassche Index Index




Index number approachIndex number approach Right choice of how to fix price Right choice of how to fix price

depends on what question we are trying to answerdepends on what question we are trying to answer can fix the prices in any manner of wayscan fix the prices in any manner of ways need to consider economic and statistical theoryneed to consider economic and statistical theory need to consider practical issuesneed to consider practical issues

Index number approachIndex number approach Test/Axiomatic approachTest/Axiomatic approach

• Treats the price and quantity data as Treats the price and quantity data as independentindependent• Determine the most appropriate functional form for an index by Determine the most appropriate functional form for an index by

specifying a number of axioms (tests) that the index ought to specifyspecifying a number of axioms (tests) that the index ought to specify Economic approach Economic approach (not the focus in this presentation)(not the focus in this presentation)

• Treats the price and quantity data as Treats the price and quantity data as dependent dependent • They are linked through a model of economic behaviourThey are linked through a model of economic behaviour




Laspeyres and Paasche indicesLaspeyres and Paasche indices

The Laspeyres and Paasche volume indices actually The Laspeyres and Paasche volume indices actually answer two different questionsanswer two different questions

Laspeyres

Passche

Using last year prices, what is the value of the

basket this year?

Using this year prices, what is the value of the

basket last year?




Laspeyres Volume IndexLaspeyres Volume Index

Fixes prices from the Fixes prices from the base base periodperiodHow much more would the value of basket be in How much more would the value of basket be in

the current period if the price in the current period the current period if the price in the current period is the same the base period?"is the same the base period?"

100

period in thebasket theof Value

price period base using


1

00

1

0

n

iii

n

i

tii

qp

qp

base

current




Laspeyres Volume Index – Laspeyres Volume Index – Another formAnother form

1001001

00

1

00

1

0

:0

n

ii

i

ti

n

iii

n

i

tii

tLaspeyres w

q

q

qp

qpI

n

iii

iii

qp

qpwwhere

1

00

000 The value share (weight) at period 0

prices and quantities for item i

Volume index formulae may be rewritten so that indices Volume index formulae may be rewritten so that indices may be constructed using values instead of pricesmay be constructed using values instead of prices




The Paasche volume indexThe Paasche volume index

Fixes prices from the Fixes prices from the current current periodperiodHow much more would the value of basket be in How much more would the value of basket be in

the current period if the same basket in the base the current period if the same basket in the base period is valued at current price?“period is valued at current price?“

100

pricescurrent using

period in thebasket same theof Value


1

0

1

n

ii

ti

n

i

ti

ti

qp

qp

base

current




ComparisonComparison

100000

202

01

01

02

021

01:0

nn

tnn

ttt

Laspeyres qpqpqp

qpqpqpI

10000

22011

2211:0

n

tn

tt

tn

tn

ttttt

Paasche qpqpqp

qpqpqpI

Which index is betterWhich index is better No information as to suggest which set of quantities yields a better No information as to suggest which set of quantities yields a better

resultresult Some compromise seems reasonableSome compromise seems reasonable

• Use prices that are some sort of average between the two periodsUse prices that are some sort of average between the two periods• Take some sort of average of the two indicesTake some sort of average of the two indices




The Fisher Ideal volume indexThe Fisher Ideal volume index

A geometric mean of the Laspeyres and the A geometric mean of the Laspeyres and the PaaschePaasche

2

1:0:0

:0:0:0

tPaasche

tLaspeyres

tPaasche

tLaspeyres

tFisher

II

III




Example Laspeyres – revalue Example Laspeyres – revalue base period pricesbase period prices

VALUE OF A BASKET FIXED USING PERIOD 0 PRICES (PRICES FROM PERIOD 0, QUANTITIES FROM PERIODS 0 AND 1)

Price Prices and values (£’s)

Commodity Period 0 Period 1

p0 q0 p0 q0

q1 p0 q1

A Agricultural commodity 1.0 1.00 1.00 1.20 1.20

B Energy 1.0 1.00 1.00 3.00 3.00

C Traditional manufacture 2.0 1.00 2.00 1.30 2.60

D High-tech goods 1.0 1.00 1.00 0.70 0.70

E Traditional services 4.5 1.00 4.50 1.40 6.30

F High-tech services 0.5 1.00 0.50 0.80 0.40

Total - - 10.00 - 14.20

Laspeyres price index - - - - 142.0

0.14210000.10£

20.14£

1005.000.1£5.400.1£0.100.1£0.200.1£0.100.1£0.100.1£

5.080.0£5.440.1£0.170.0£0.230.1£0.100.3£0.120.1£1006

1

00

6

1

10

1:0

iii

iii

Laspeyres

qp

qpI




Example Paasche – revalue Example Paasche – revalue current period pricescurrent period prices

VALUE OF A BASKET FIXED USING PERIOD 1 PRICES (PRICES FROM PERIOD 1, QUANTITIES FROM PERIODS 0 AND 1)

Price Prices and values (£’s)

Commodity Period 0 Period 1

p1 q0 p1 q0

q1 p1 q1

A Agricultural commodity 0.8 1.00 0.8 1.20 0.96

B Energy 0.9 1.00 0.9 3.00 2.7

C Traditional manufacture 1.9 1.00 1.9 1.30 2.47

D High-tech goods 1.3 1.00 1.3 0.70 0.91

E Traditional services 4.7 1.00 4.7 1.40 6.58

F High-tech services 0.6 1.00 0.6 0.80 0.48

Total - - 10.20 - 14.1

Paasche price index - - - - 138.2

2.13810020.10£

10.14£

1006.000.1£7.400.1£3.100.1£9.100.1£9.000.1£8.000.1£

6.080.0£7.440.1£3.170.0£9.130.1£9.000.3£8.020.1£1006

1

01

6

1

11

1:0

iii

iii

Paasche

qp

qpI




The Fisher Ideal Volume IndexThe Fisher Ideal Volume Index

1.140

4.624,19

2.1380.142

1:01:01:0

PaascheLaspeyresFisher III




The Fisher Ideal Volume IndexThe Fisher Ideal Volume Index

1:01:01:0

0.1421.1402.138

LaspeyresFisherPaasche III




Fixed Base versus Chain IndicesFixed Base versus Chain Indices

To compare more than 3 periodsTo compare more than 3 periods Fixed base index (direct approach)Fixed base index (direct approach) Chain index (indirect approach)Chain index (indirect approach)




Fixed base volume indexFixed base volume index

Hold one period as the base period and compare Hold one period as the base period and compare all prices back to this periodall prices back to this period

Calculate movement back to the base period for Calculate movement back to the base period for each successive time pointeach successive time point

Each index in the time series is a comparison from Each index in the time series is a comparison from that period back to the base periodthat period back to the base period




Fixed base indicesFixed base indices

Direct (fixed base) volume indices, 0 to 4TABLE 2.12- PRICES AND QUANTITIES FOR SIX COMMODITIES, WITH DIRECT LASPEYRES VOLUME INDICES. Value of basket (£’s) fixed in period 0 prices

Commodity 0 1 2 3 4

A Agricultural commodity qAt pA

0 1.00 1.20 1.00 0.80 1.00

B Energy qBt pB

0 1.00 3.00 1.00 0.50 1.00

C Traditional manufacture qCt pC

0 2.00 2.60 3.00 3.20 3.20

D High-tech goods qDt pD

0 1.00 0.70 0.50 0.30 0.10

E Traditional services qEt pE

0 4.50 6.30 7.65 8.55 9.00

F High-tech services qFt pF

0 0.50 0.40 0.30 0.20 0.10

Total 10.00 14.20 13.45 13.55 14.40

Direct Laspeyres volume index (change from period 0)

100.0 142.0 134.5 135.5 144.0




Direct (Fixed Base) Index

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=10

0.0)

Fixed base indicesFixed base indices




Fixed base indicesFixed base indicesDirect (Fixed Base) Index

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=10

0.0)




Chain volume indicesChain volume indices Calculate consecutive period volume indices:Calculate consecutive period volume indices:

Use a period 0 basket to look at period 0 to 1 changesUse a period 0 basket to look at period 0 to 1 changes




Chain these results together to get a measure of price change from 0 to Chain these results together to get a measure of price change from 0 to 4 4



for ECLAC member states Module 2 - Constructing a Price Index 31

Chain indicesChain indicesConsecutive period indices

80

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=10

0.0)




Chain indicesChain indices

CALCULATION OF INDIRECT (CHAINED) LASPEYRES VOLUME INDICES AND COMPARISON WITH DIRECT (FIXED BASE) LASPEYRES VOLUME INDICES

Period

Index 0 1 2 3 4

Direct volume index, period 0 to 1 100.0 142.0 - - -

Direct volume index, period 1 to 2 - 100.0 96.1 - -

Indirect (Chained) volume index, periods 0 to 2 100.0 142.0 136.5 - -

Direct volume index, period 2 to 3 - - 100.0 97.8 -

Indirect (Chained) volume index, periods 0 to 3 100.0 142.0 136.5 133.5 -

Direct volume index, period 3 to 4 - - - 100.0 99.7

Indirect (Chained) volume index, periods 0 to 4 100.0 142.0 136.5 133.5 133.1

Direct (Fixed base, period 0) volume index, periods 0 to 4

100.0 142.0 134.5 135.5 144.0



for ECLAC member states Module 2 - Constructing a Price Index 33

Chain indicesChain indices

Consecutive period indices

80

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=10

0.0)




Indirect (chain) volume indicesIndirect (chain) volume indices

Chaining!Chaining!Indirect (Chained) Index

80

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=

100.0

)




ComparisonComparisonComparison between Fixed basket and Chained Indices

80

90

100

110

120

130

140

150

0 1 2 3 4

Period

Ind

ex (

0=

100.0

)

Different resultDifferent result special case of equality is called a special case of equality is called a transitivetransitive index formula index formula

• fixed baskets with fixed baskets with differential weightsdifferential weights never transitive never transitive




Fixed Base versus Chain IndicesFixed Base versus Chain Indices

Fixed base result more attractive operationallyFixed base result more attractive operationally one revaluing stepone revaluing step one set of price dataone set of price data

Why would we chain?Why would we chain? Updating the basket and weights!Updating the basket and weights!

Recommendation for IIP Recommendation for IIP Annual chainlinking (will be discussed later)Annual chainlinking (will be discussed later)




Conceptual illustration of IIP annual chaining

80

85

90

95

100

105

110

115

120

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Month

Ind

ex

nu

mb

er




SummarySummary Volume indices can be constructed by deflating a Volume indices can be constructed by deflating a fixed basketfixed basket of of

commodities with commodities with fix pricesfix prices

When constructing a volume index, choice of fixed prices from When constructing a volume index, choice of fixed prices from different periods gives different volume index number formulaedifferent periods gives different volume index number formulae Laspeyres Laspeyres PasschePassche FisherFisher

For comparison over three periods or more, two approaches were For comparison over three periods or more, two approaches were introducedintroduced Fixed baseFixed base approach approach ChainChain approach approach




Index of Industrial Production (IIP)Index of Industrial Production (IIP)

IIP is a volume index.IIP is a volume index. Purpose: Purpose:

Reflect the volume developments in goods or services Reflect the volume developments in goods or services produced over timeproduced over time

Provide a measure of the short-term changes in value Provide a measure of the short-term changes in value added over a given reference period.added over a given reference period.

UseUse Important short-term indicators to assess the Important short-term indicators to assess the

performance of an economyperformance of an economy In some countries, a key input for calculating volume In some countries, a key input for calculating volume

measures as part of the compilation of the quarterly measures as part of the compilation of the quarterly national accountnational account




Major issuesMajor issues

Major issues to considerMajor issues to consider Statistical unit, classifications and the business Statistical unit, classifications and the business

registerregister Scope and frequencyScope and frequency Sources and methodsSources and methods Index compilationIndex compilation Presentation and disseminationPresentation and dissemination

International Recommendation of Index of International Recommendation of Index of Industrial Production (IRIIP)!Industrial Production (IRIIP)!




International Recommendations for the International Recommendations for the Index of Industrial Production (IRIIP)Index of Industrial Production (IRIIP)

Index of Industrial Production has been calculated Index of Industrial Production has been calculated since the 1920ssince the 1920s UNSD has collected series going back to 1938UNSD has collected series going back to 1938 Methodology was described in 1950 UN Manual Methodology was described in 1950 UN Manual

on “Index of industrial production”on “Index of industrial production”• Number 1 in series of publications on Number 1 in series of publications on

international recommendations and guidelines international recommendations and guidelines (Series F)(Series F)

The manual was under revision since 2005, and the The manual was under revision since 2005, and the updated IRIIP was adopted by the United Nations updated IRIIP was adopted by the United Nations Statistical Commission in 2010 Statistical Commission in 2010




Objectives of revised IRIIPObjectives of revised IRIIP OutlineOutline practical and suitable measurement methods and document issues and practical and suitable measurement methods and document issues and

benefits from recent theoretical and practical work in the area.benefits from recent theoretical and practical work in the area.

AssistAssist countries/data compilers countries/data compilers in producing more in producing more accurate accurate IIP.IIP. in producing index numbers in in producing index numbers in comparablecomparable ways ways that plan to set up a more comprehensive systems of volume measures that plan to set up a more comprehensive systems of volume measures

• by providing the by providing the methodological foundationsmethodological foundations for the IIP for the IIP• by giving by giving practical guidance on individual steps and elementspractical guidance on individual steps and elements of the of the

compilation processcompilation process

It is recognized that due to practical constraints, some of the recommendations It is recognized that due to practical constraints, some of the recommendations in this publication may not be immediately attainable by all statistical offices in this publication may not be immediately attainable by all statistical offices and, therefore, should serve as and, therefore, should serve as guidepostsguideposts for agencies as they revise and for agencies as they revise and improve their IIP programsimprove their IIP programs




Additional inputs consideredAdditional inputs considered

Recent work on other index number publications:Recent work on other index number publications: Producer Price Index Manual (World Bank et al., 2004)Producer Price Index Manual (World Bank et al., 2004) Consumer Price Index Manual (ILO et al., 2004)Consumer Price Index Manual (ILO et al., 2004) Handbook on price and volume measures in national Handbook on price and volume measures in national

accounts (Eurostat, 2001)accounts (Eurostat, 2001) Compilation Manual for an Index of Service Production Compilation Manual for an Index of Service Production

(OECD, 2007)(OECD, 2007) New manual should be consistent with other existing New manual should be consistent with other existing

manuals (e.g. IRIS & SNA) manuals (e.g. IRIS & SNA)




Publication structurePublication structure Part IPart I includes a description of the international includes a description of the international

recommendations, covering scope, fundamental concepts, recommendations, covering scope, fundamental concepts, etc.etc. It is encouraged that countries comply with the It is encouraged that countries comply with the

recommendations set out in Part I.recommendations set out in Part I.

Part IIPart II includes international guidance to assist countries in includes international guidance to assist countries in implementing these recommendationsimplementing these recommendations It presents a set of methods (categorized as ‘preferred’, It presents a set of methods (categorized as ‘preferred’,

‘alternative’ and ‘other’) and variables for each ISIC ‘alternative’ and ‘other’) and variables for each ISIC Rev. 4 class in scope of this publication for the Rev. 4 class in scope of this publication for the compilation of an IIP, based on current country compilation of an IIP, based on current country practicespractices




Major changesMajor changes ScopeScope

Enlarged definition of “industry”Enlarged definition of “industry” Recommended calculation methodRecommended calculation method

Deflation vs volume extrapolationDeflation vs volume extrapolation• Deflation : Use a price deflator to remove the price component Deflation : Use a price deflator to remove the price component

from an overall value measure, isolating the volume from an overall value measure, isolating the volume componentcomponent

• Volume extrapolation: Build a measurement that uses only Volume extrapolation: Build a measurement that uses only volume changes at detailed levelvolume changes at detailed level

Frequency Frequency of weight updatesof weight updates Annual updates vs. 5-yearly updatesAnnual updates vs. 5-yearly updates Chain linking vs. fixed-weight approachChain linking vs. fixed-weight approach

Other recommendationsOther recommendations, such as on seasonal adjustment or , such as on seasonal adjustment or dissemination issues reflect an update of previous recommendations as dissemination issues reflect an update of previous recommendations as wellwell




Key issues/recommendationsKey issues/recommendations 1: Statistical units, classifications & business register1: Statistical units, classifications & business register

Statistical unit:Statistical unit: establishmentestablishment ClassificationClassification

• International Standard Industrial Classification of All International Standard Industrial Classification of All Economic Activities (ISIC) Rev.4Economic Activities (ISIC) Rev.4 for industry classification for industry classification

• Central Product Classification (CPC) Rev. 2Central Product Classification (CPC) Rev. 2 for product for product classification.classification.

Business register and data sourceBusiness register and data source• Business registerBusiness register as a basis from which a sampling frame is as a basis from which a sampling frame is

identifiedidentified• Sample selection is Sample selection is updated each yearupdated each year to coincide with the to coincide with the

updates of weights.updates of weights.• Utilize administrative sourceUtilize administrative source for the purpose of developing for the purpose of developing

and maintaining a sampling frame and as a data source to and maintaining a sampling frame and as a data source to reduce response burdenreduce response burden




Key issues/recommendationsKey issues/recommendations

2: Frequency2: Frequency Publication recommends Publication recommends monthly monthly

compilationcompilation of the IIP so that turning of the IIP so that turning points in economic activity can be points in economic activity can be identified as early as possibleidentified as early as possible




Key issues/recommendationsKey issues/recommendations 3: Scope of the IIP:3: Scope of the IIP:

Scope is defined to cover activities in Scope is defined to cover activities in sections B - E of ISIC Rev.4sections B - E of ISIC Rev.4• Mining and quarrying (B) Mining and quarrying (B) • Manufacturing (C ) Manufacturing (C ) • Electricity, gas steam and air-conditioning supply (D)Electricity, gas steam and air-conditioning supply (D)• Water supply, sewerage, waste management and remediation Water supply, sewerage, waste management and remediation

activities (E)activities (E)

Section E contains new areas for inclusion in the IIPSection E contains new areas for inclusion in the IIP

This scope coincides with the scope of the International This scope coincides with the scope of the International Recommendations for Industrial Statistics (IRIS) 2008, which Recommendations for Industrial Statistics (IRIS) 2008, which includes the index numbers of industrial production in its list of includes the index numbers of industrial production in its list of recommended indicatorsrecommended indicators




Key issues/recommendationsKey issues/recommendations 4: Index formula4: Index formula

Laspeyres-type indexLaspeyres-type index is recommended is recommended• Preferred due to feasibility over Paasche or Fischer Preferred due to feasibility over Paasche or Fischer

indexindex Chain linkedChain linked, rather than fixed base indices are , rather than fixed base indices are

recommendedrecommended

5: Weights and updates5: Weights and updates Weights for industry branchesWeights for industry branches Product group weightsProduct group weights Product weightsProduct weights




Total IIP

1-digit ISIC

2-digit ISIC

4-digit ISIC

Product groups assigned to one 4 digit ISIC branch

3-digit ISIC

Stage 3: Weights for industry branches – Gross value added at basic prices

Stage 2: Product group weights – Value of output obtained via census/survey

Stage 1: Product weights –Value of output obtained via census/survey

Individual sampled products assigned to one product group

IIP weights IIP weights

5. Weights and updates (cont.)5. Weights and updates (cont.) Industry level weightsIndustry level weights

• Annual update Annual update should be carried out.should be carried out.• Should ideally be Should ideally be National Accounts value added figures at National Accounts value added figures at

basic pricesbasic prices – adjustments necessary to make them timely – adjustments necessary to make them timely available.available.

Product group weightsProduct group weights• Should be updated frequently Should be updated frequently at least every 5 yearsat least every 5 years• Obtained by determining the share of value of output, via the Obtained by determining the share of value of output, via the

conduct of product census or surveysconduct of product census or surveys Product weightsProduct weights

• The weights of individual products are updated at the same The weights of individual products are updated at the same time as product grouptime as product group

• Obtained by determining the share of value of output, via the Obtained by determining the share of value of output, via the conduct of product census or surveysconduct of product census or surveys







Key issues/recommendationsKey issues/recommendations 6: Calculation method6: Calculation method

DeflationDeflation should be used to obtain volume estimates from value should be used to obtain volume estimates from value data, rather than volume extrapolation methoddata, rather than volume extrapolation method

• PPI is recommended as deflatorPPI is recommended as deflator• Deflation should be done at lowest level, i.e. 4-digit industry Deflation should be done at lowest level, i.e. 4-digit industry

levellevel

ExceptionsExceptions are made by industry, e.g. if only a small set of are made by industry, e.g. if only a small set of products exist and if quality changes are not a major concernproducts exist and if quality changes are not a major concern

• Volume aggregation still works for these exceptional areaVolume aggregation still works for these exceptional area• Chapter 7 of the publication provides recommendations by Chapter 7 of the publication provides recommendations by

industry, including choice of variablesindustry, including choice of variables




Key issues/recommendationsKey issues/recommendations 7. Variables to be used7. Variables to be used

To approximate industrial production for the IIP, To approximate industrial production for the IIP, output output measures (value or physical quantity of output)measures (value or physical quantity of output) are preferred are preferred over input measures (labour or materials consumed)over input measures (labour or materials consumed)

The publication provides suggestions for preferred, alternate The publication provides suggestions for preferred, alternate and other methods for the use of variables in the IIP and other methods for the use of variables in the IIP calculation.calculation.

• Suggestions are specific for each ISIC industry at 4-digit Suggestions are specific for each ISIC industry at 4-digit levellevel




Key issues/recommendationsKey issues/recommendations

8: Data adjustments8: Data adjustments

Adjustments should be made for Adjustments should be made for quality changesquality changes• Either through the Either through the correction of PPIcorrection of PPI used in used in

deflation, ordeflation, or• by by adjusting input dataadjusting input data when volume aggregation is when volume aggregation is

usedused

Data series should be produced as Data series should be produced as working day working day adjustedadjusted as well as as well as seasonally adjusted seriesseasonally adjusted series




ISICDescription

Explanatory notes

Product or product groups, by industry

Preferred method

Alternate method

Other methods

1104Manufacture of soft drinks; production of mineral waters and other bottled waters

This class includes:- manufacture of non-alcoholic beverages, except non-alcoholic beer and wine

Waters (including mineral waters and aerated waters), not sweetened nor flavoured, except natural water, ice and snowOther non-alcoholic beverages

Deflated indicatorValue of output deflated by appropriate quality adjusted PPI

Volume indicatorQuantity (count) of products produced, by product

Volume indicatorNumber of hours worked adjusted for changes in productivity

Example of recommendationsExample of recommendations




ISICDescription

Explanatory notes

Product or product groups, by industry

Preferred method

Alternate method

Other methods

2750Manufacture of domestic appliances

This class includes the manufacture of small electric appliances and electric housewares.

-Refrigerators-Freezers-Dishwashers-Washing and drying machines-Vacuum cleaners-Electric water heaters

Deflated indicatorValue of output deflated by appropriate quality adjusted PPI

Volume indicatorQuantity (count) of products produced, by product

Volume indicatorNumber of hours worked adjusted for changes in productivity

Example of recommendationsExample of recommendations




Key issues/recommendationsKey issues/recommendations 9: Dissemination9: Dissemination

The publication outlines elements / requirements for the The publication outlines elements / requirements for the dissemination of IIP datadissemination of IIP data

General requirements for international reporting are set in the General requirements for international reporting are set in the International Recommendations for Industrial Statistics (IRIS) International Recommendations for Industrial Statistics (IRIS) 20082008

UNSD data collection will continue at 2-digit ISIC level for UNSD data collection will continue at 2-digit ISIC level for annual and quarterly data, 1-digit ISIC level for monthly dataannual and quarterly data, 1-digit ISIC level for monthly data

• Currently for raw (unadjusted) data onlyCurrently for raw (unadjusted) data only• Will switch to ISIC Rev.4 for production of regional IIPWill switch to ISIC Rev.4 for production of regional IIP

OutsourcingOutsourcing

Products can include the Products can include the manufacturing services manufacturing services of CPC of CPC Ver.2 Division 88 & 89Ver.2 Division 88 & 89 88 – Manufacturing services on physical inputs owned by others 89 – Other manufacturing services; publishing, printing and

reproduction services;

If unit A outsource part of its production to another unit B that now provides manufacturing services to A Unit A: Intermediate inputs that are outsourced to B should be

counted as intermediate consumption and be deducted from the unit’s gross output.

Unit B: Gross output increases







SummarySummary We have described the purpose and the use of IIP We have described the purpose and the use of IIP

In constructing the IIP, several issues needed to be considered. In constructing the IIP, several issues needed to be considered. The The International Recommendation for the Index of Industrial Production International Recommendation for the Index of Industrial Production (IRIIP), which was recently updated and adopted by UNSC 2010, (IRIIP), which was recently updated and adopted by UNSC 2010, providing several key recommendations in IIP construction. providing several key recommendations in IIP construction.

Major changesMajor changes Enlarged scope of IIPEnlarged scope of IIP Deflation over volume extrapolation methodDeflation over volume extrapolation method Annual updates over. 5-yearly updatesAnnual updates over. 5-yearly updates Chain linking over fixed-weight approachChain linking over fixed-weight approach



Slide 60 of 89

Re-weighting, linking and re-Re-weighting, linking and re-referencing the IIPreferencing the IIP




Total IIP

1-digit ISIC

2-digit ISIC

4-digit ISIC

Product groups assigned to one 4 digit ISIC branch

3-digit ISIC

Stage 3: Weights for industry branches – Gross value added at basic prices

Stage 2: Product group weights – Value of output obtained via census/survey

Stage 1: Product weights –Value of output obtained via census/survey

Individual sampled products assigned to one product group

IIP weights IIP weights




More about weightsMore about weights

Over time, relative importance may changeOver time, relative importance may change Products within a product group Products within a product group Product groups within an industryProduct groups within an industry Lower level industries within higher level aggregatesLower level industries within higher level aggregates

For the IIP to reflect the movements as good as possible, For the IIP to reflect the movements as good as possible, the weights have to reflect these changesthe weights have to reflect these changes




WeightsWeights

Weights are used to aggregate series into higher level Weights are used to aggregate series into higher level aggregatesaggregates Can be done at different levelsCan be done at different levels Weights have to be chosen accordinglyWeights have to be chosen accordingly

Weights have to reflect the relative importance of the Weights have to reflect the relative importance of the individual components within the aggregateindividual components within the aggregate




Old recommendationsOld recommendations Use fixed weights for the calculationUse fixed weights for the calculation Update weights every 5 yearsUpdate weights every 5 years Recalculate entire seriesRecalculate entire series

Problem:Problem: New weights may reflect better the movements in the New weights may reflect better the movements in the

current periods, but they are not applicable for past data current periods, but they are not applicable for past data (far from new weight period)(far from new weight period)

• Problem simply shifts to a different periodProblem simply shifts to a different period




New recommendationsNew recommendations

Update weights more frequentlyUpdate weights more frequently Recommended: AnnuallyRecommended: Annually

Do not re-calculate entire seriesDo not re-calculate entire seriesUse chain linking to produce time Use chain linking to produce time

series for IIPseries for IIP




New recommendationsNew recommendations

Chain-linking annually rebased series Chain-linking annually rebased series allows for better reflection of current allows for better reflection of current economic structure in the weights in economic structure in the weights in each of the sub-serieseach of the sub-series Current period and weight base Current period and weight base

period are not too far apartperiod are not too far apart




LinkingLinking

How to link the individual sub-series to obtain longer time How to link the individual sub-series to obtain longer time series?series?

A linking factor has to be determined to link the new series A linking factor has to be determined to link the new series to the existing historical seriesto the existing historical series This factor is then applied to the new (old) series to This factor is then applied to the new (old) series to

convert it to the old (new) base yearconvert it to the old (new) base year




LinkingLinking

The long-term time series are The long-term time series are calculated from a succession of short-calculated from a succession of short-term series with updated weightsterm series with updated weights

• Note: Short-term series can span Note: Short-term series can span any number of periodsany number of periods




Linking options Linking options

Annual overlap, linking factor based on Annual overlap, linking factor based on annual index for years t annual index for years t index of the same year using weights of year t-1 index of the same year using weights of year t-1

One-quarter overlap, linking factor based on One-quarter overlap, linking factor based on index of the first quarter of year t index of the first quarter of year t Index of the same quarter using weights of year t-1Index of the same quarter using weights of year t-1

Over-the-year techniqueOver-the-year technique Linking factor based on same periods for years t and t-1Linking factor based on same periods for years t and t-1




Recommended method ?Recommended method ?

Annual overlap techniqueAnnual overlap technique More practical for Laspeyres-type volume measuresMore practical for Laspeyres-type volume measures Monthly/quarterly data aggregate to annual dataMonthly/quarterly data aggregate to annual data

• However, there are no clear established rules for However, there are no clear established rules for choosing this approachchoosing this approach

• In most cases, the approaches will give similar In most cases, the approaches will give similar resultsresults



Slide 72 of 89

Two main approaches to Two main approaches to calculate the IIPcalculate the IIP




GoalGoal

Measure volume changes over timeMeasure volume changes over time The measurement should not reflect The measurement should not reflect

price changes in the measurement price changes in the measurement periodperiod




OptionsOptions

1) Build a measurement that uses only 1) Build a measurement that uses only volume changes at detailed levelvolume changes at detailed level ““Volume extrapolation”Volume extrapolation”

2) Use a price deflator to remove the price 2) Use a price deflator to remove the price component from an overall value measure, component from an overall value measure, isolating the volume componentisolating the volume component ““Deflation”Deflation”




Recommended approachRecommended approach

The 1950 IIP manual relied on the The 1950 IIP manual relied on the volume extrapolation approachvolume extrapolation approach

The 2010 IIP manual recommends The 2010 IIP manual recommends mostly the deflation methodmostly the deflation method Recommendations depend on Recommendations depend on

industry (see chapter 7)industry (see chapter 7)




What separates the two What separates the two approaches?approaches?

Calculation method (formula)Calculation method (formula)Data requirementsData requirements

Data availabilityData availabilityWork loadWork loadStability, ability to adaptStability, ability to adapt




Volume extrapolationVolume extrapolation

concept : utilize the movements in volumes concept : utilize the movements in volumes directly to calculate an IIPdirectly to calculate an IIP

suitable : volume variablessuitable : volume variablesformula : IIP=Qformula : IIP=Q11/Q/Q00 (at (at

elementary/product level)elementary/product level) Use weights to aggregate to higher levelsUse weights to aggregate to higher levels





Possible input data:Possible input data: Output variablesOutput variables

• Physical quantity of output (at individual product Physical quantity of output (at individual product Input variablesInput variables

• Labor inputLabor input• Materials consumedMaterials consumed

While input data are sometimes easier to obtain, they While input data are sometimes easier to obtain, they assume a fixed relationship between input and outputassume a fixed relationship between input and output





Data requirementsData requirements Data need to be available for a detailed set of productsData need to be available for a detailed set of products

• Volume extrapolation starts at the product level, Volume extrapolation starts at the product level, then aggregates through product groups and then aggregates through product groups and industriesindustries

Products have to be representative for the respective Products have to be representative for the respective industries fro which the IIP is compiledindustries fro which the IIP is compiled

Work loadWork load High due to need for detailed product data (collection High due to need for detailed product data (collection

and processing)and processing)





StabilityStability In some areas, shifting of production between In some areas, shifting of production between

products (or product groups) can negatively products (or product groups) can negatively influence the data qualityinfluence the data quality• Example: pharmaceuticalsExample: pharmaceuticals

Ability to adaptAbility to adapt Difficult to account for quality changesDifficult to account for quality changes




Deflation methodDeflation method

concept : isolate the volume component from concept : isolate the volume component from value variables value variables

suitable : value variablessuitable : value variablesformula :formula :

IIP=(ValueIIP=(Value11/Price index) / Value/Price index) / Value00

=(∑P=(∑P11QQ11/Price Index) / ∑P/Price Index) / ∑P00QQ00

• At level where price index is availableAt level where price index is available





Possible input data:Possible input data: Output variables:Output variables:

• Value of outputValue of output

• Value of output soldValue of output sold

Needed only at more aggregated level Needed only at more aggregated level than data for volume extrapolationthan data for volume extrapolation





Data requirementsData requirements Data need to be available only at a higher level of Data need to be available only at a higher level of

aggregationaggregation BUT: “Appropriate” deflator (price index) needs to be BUT: “Appropriate” deflator (price index) needs to be

available at this level tooavailable at this level too Deflation should take place at lowest level possibleDeflation should take place at lowest level possible

• Typically: 4-digit ISIC level; could be product Typically: 4-digit ISIC level; could be product group levelgroup level





Work loadWork load Reduced (less detailed data collection and Reduced (less detailed data collection and

processing)processing) BUT: price index needs to be calculatedBUT: price index needs to be calculated

• Responsibility shifts to another areaResponsibility shifts to another area• ““Duplication” of work can be avoidedDuplication” of work can be avoided





StabilityStability Price movements are more stable than quantity Price movements are more stable than quantity

movements in many areasmovements in many areas Deflation provides a better tool (while investing same Deflation provides a better tool (while investing same

amount of work) to calculate IIP for areas with amount of work) to calculate IIP for areas with frequently/seasonally shifting product patternsfrequently/seasonally shifting product patterns

Ability to adaptAbility to adapt Quality effects are accounted for in the deflator (price Quality effects are accounted for in the deflator (price

index)index)



Slide 86 of 89





Composite IndexComposite Index Formed when individual indicators are compiled into a Formed when individual indicators are compiled into a

single index, on the basis of an underlying model of the single index, on the basis of an underlying model of the multi-dimensional concept that is being measured. multi-dimensional concept that is being measured.

Measures multi-dimensional concepts (e.g. business cycle, Measures multi-dimensional concepts (e.g. business cycle, competitiveness) which cannot be captured by a single competitiveness) which cannot be captured by a single indicator. indicator.

Ideally, a composite index should be based on a theoretical Ideally, a composite index should be based on a theoretical framework / definition, which allows individual framework / definition, which allows individual indicators / variables to be selected, combined and indicators / variables to be selected, combined and weighted in a manner which reflects the dimensions or weighted in a manner which reflects the dimensions or structure of the phenomena being measured. structure of the phenomena being measured.


Composite indices that assess the performance of Composite indices that assess the performance of an economyan economy E.g. Cyclical composite Index, Turning point E.g. Cyclical composite Index, Turning point

indexindex Many high-frequency industrial statistics are Many high-frequency industrial statistics are

used as components for these types of used as components for these types of composite indexcomposite index• such as IIP, output, production, capacity such as IIP, output, production, capacity

utilization, sales & orders, wagesutilization, sales & orders, wages







ProsPros ConsCons

Summarize complex, multi-dimensional realities with a view to supporting decision making

May send misleading policy messages if poorly constructed or misinterpreted

Are easier to interpret than a battery of many separate indicators

May invite simplistic policy conclusions

Reduce the visible size of a set of indicators without dropping the underlying information. Make it possible to Make it possible to include more information within the existing size limitinclude more information within the existing size limit

May be misused if the construction process is not May be misused if the construction process is not transparent and/or lacks sound statistical or transparent and/or lacks sound statistical or conceptual principlesconceptual principles

Help to construct/underpin narratives for lay and literate Help to construct/underpin narratives for lay and literate audienceaudience

The selection of component variables and weights The selection of component variables and weights could be subject to political disputecould be subject to political dispute

Enable users to compare complex dimensions effectivelyEnable users to compare complex dimensions effectively May disguise serious failings in some dimensions May disguise serious failings in some dimensions and increase the difficulty of identifying proper and increase the difficulty of identifying proper remedial action, if the construction process is not remedial action, if the construction process is not transparenttransparent

17 march 2010 eclac, santiago workshop on manufacturing statistics for eclac member states slide 1...

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