BLS Handbook of Methods

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Chapter 15.
International Price Indexes

Pricing
Items, item specifications, and initial prices are collected by the field economist during the interview. Most subsequent pricing is conducted by the BLS national office on a monthly basis for goods and a quarterly basis for services. The reporters can choose from different reporting mechanisms including surface mail, fax, or telephone. If data clarification is required or the form is not returned by the deadline, the firm may be contacted by phone.

Most of the prices that are used to calculate price indexes for the International Price Program are actual transaction prices in the foreign trade market. Respondents are asked to provide prices for actual transactions that occur as close as possible to the first day of the month. Other types of prices such as estimated or list prices may be accepted for calculation in the indexes, but prices for actual transactions that occur at any time during the month are preferable to non-transaction prices. Estimated prices are estimates of the price that would have been charged for a transaction as close to the beginning of the month as possible. Whenever discounts apply to the actual, estimated, or list price, they are deducted from the reported price to calculate a net price. The major types of discounts are cash, distributor, and quantity.

Generally, IPP accepts prices associated with intra-company transfers and production sharing. Intra-company transfers are typically items that are traded between affiliates or entities of the same company. IPP, however, only uses intra-company transfer prices that are market-based or market-influenced. Production sharing occurs when the responsibility for producing a product is shared between either two (or more) independent companies or various affiliated units of the same company that are located in different countries.

Average prices are not generally accepted in the IPP survey, with the exception of selected commodities that are priced using secondary source data. Petroleum, ocean tanker freight, and grains data are examples of secondary source indexes that use weighted average prices in index calculation.

Import and export prices can be quoted in many different price bases. For imports, the preferred price basis is f.o.b. (free on board) foreign port. The f.o.b. foreign port price is the price free on board at the foreign port of exportation before insurance, freight, or duty are added. For exports, the preferred price basis is f.a.s. (free alongside ship), the price of the item at the U.S. port of embarkation. This includes insurance charges plus the cost of transporting the good from the place of manufacture to the exit port. In some product areas such as finished manufactures, firms frequently provide prices only on an f.o.b. factory basis. Although the f.o.b. foreign port and f.a.s. price bases are preferred, IPP will use other price bases such as cif for imports as long as the firms can provide consistent price series.

The goal of the International Price Program is to produce valid price indexes that track the price trends for consistent items over time. To do this, IPP sends respondents a pricing form that contains all the current information about the item, including a detailed item description and the trade factors. Item descriptions indicate the physical characteristics of an item and can change over time. The trade factors associated with each item include the units priced, the country of origin/destination, the discount structure, the class of buyer or seller, and for imports, the duty amount when appropriate. Like the item description, the trade factors can vary and significantly affect the price. Any change in an item's description or the trade factors is reviewed to determine their significance.

If the changes are substantive item substitution is made by linking. This insures that the index reflects only actual or "pure" price changes and is not moved by unadjusted quality changes. The linking principle is to calculate what the "old" item would trade for in the new time period. To do this, reporters are asked for the dollar amount attributed to the change. This value is then subtracted from the "new" item in the current time period.

When a completely new item series is added to a classification grouping, linking is not feasible. Instead, the relative importance of each item in the classification group is redistributed to include the new item, and the historical movement of the index is used to begin the series for the item. A change in the relative importance of an item also occurs when other items are dropped from an index without replacement.

An item may be replaced if the composition of the old item differs from the newly available item to the degree that the comparison of the prices is not feasible. Each replacement item must be as closely related to the original item as possible and must fall into the same detailed item category.

When an item should be replaced but a new item is not available or the expected discontinuation date of the item being replaced is within the next 18 months, the International Price Program discontinues the item. Data on the deterioration of coverage is used to refine future sampling allocations to publishable strata.

Next: Index Construction

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