EXPLANATORY NOTES


INTRODUCTION

1 This publication contains indexes measuring changes in the prices paid for imports of merchandise that are landed in Australia each quarter and prices received for exports of merchandise that are shipped from Australia each quarter. The import price indexes are in tables 1-6 and the export price indexes are in tables 7-11.

2 The indexes are calculated on the index reference period 2011-12 = 100.0.


SCOPE

3 The import price index excludes the following items (representing less than 5% of the value of merchandise imported during the weighting period) because of the inherent difficulties in pricing the items to constant quality (see paragraph 15 below):

• live animals (not for food)
• jewellery and other articles of precious metal, n.e.s.
• military equipment
• commodities not classified according to kind
• works of art, collectors' pieces, antiques
• railway vehicles
• ships of various types.

4 The export price index includes re-exports of merchandise (i.e. goods which are imported into Australia and exported at a later date without physical transformation).


CLASSIFICATIONS

5 Index numbers for selected sections of the Standard International Trade Classification (SITC) are provided in table 3 (import price index) and table 9 (export price index). The SITC (Revision 4) used from the September quarter 2008 onwards is the United Nations' updated version, replacing SITC (Revision 3). SITC (Revision 4) retains the overall structure of SITC (Revision 3) and consists of the same number of sections, divisions and groups. Changes to the classification labels and components were made at levels lower than those used in the import and export prices indexes. As a result, there has been no material impact on the indexes, which remain comparable across the changes in classification.

6 The import price index is also presented by Balance of Payments Broad Economic Categories in tables 4-6, which have been disaggregated into balance of payments groupings of consumption goods, capital goods and intermediate and other merchandise goods. From the September quarter 2008 onwards, the previous heading of Classification of Broad Economic Categories (BEC) End Use, has been replaced with Balance of Payments Broad Economic Categories. This is simply a name change, with the series remaining comparable to previously published series.

7 The export price index is also presented by balance of payments classification of exports groupings in tables 10 and 11.


ITEMS AND WEIGHTS

8 The import price index and export price index are annually reweighted chained Lowe indexes. This method of weighting was introduced for the September quarter 2000 and replaced the 'fixed-base' method of weighting in which the weighting patterns were updated infrequently (generally once every 5 or 10 years).

9 The annual reweighting and chaining process involves a number of steps in order to provide new weights each year. The current weighting basis for the import price index was derived from the average value of import items during 2014-15. This differs slightly from the export price index which has used the average value of export items during 2013-14 and 2014-15, due to the greater volatility associated with the value of export items. These weights were revalued to reflect link period (June quarter 2015) price levels. This means, for example, that the weights for the import price index are effectively determined using quantities from 2014-15 and prices from the June quarter 2015. Indexes derived by using the new weights for the September quarter 2015 were then linked to the already published June quarter 2015 (link period) levels which were derived using the previous series weights. Using this methodology, long-term chain linked series can be constructed over time on a consistent reference base for continuity and user convenience, but using annually refreshed weights. From the September quarter 2012, the index reference period for each index series is 2011-12 = 100.0 even though the weights are being updated each year.

10 The commodities directly represented in each index (the index items) were selected on the basis of the significance of their import and export values in the period 2014-15 for imports and 2013-14 and 2014-15 for exports. All significant commodities were selected for pricing. The weights for minor commodities which are not directly priced are included with those of comparable directly priced items where prices are likely to move in a similar way.


PRICE MEASUREMENT

11 In general, prices of individual shipments are obtained from major importers and exporters of the selected items and relate to the quarter in which the imported goods physically arrive in Australia and the exported goods physically leave Australia.

12 Imports are priced on a 'free on board' (f.o.b.), country of origin basis. Therefore freight and insurance charges involved in shipping goods from foreign to Australian ports are excluded from the prices used in the index, as are Australian import duties and taxes. Similarly, exports are priced on a f.o.b. basis at the main Australian ports of export. Exports are exempt from taxes on products.

13 As the prices used in the indexes are expressed in Australian currency, changes in the relative value of the Australian dollar and overseas currencies can have a direct impact on price movements for the many commodities that are bought and sold in currencies other than Australian dollars. Prices reported in a foreign currency are converted to Australian dollars using relevant exchange rates. Where imports or exports are transacted in prices expressed in terms of a foreign currency and forward exchange cover is used, the prices in the indexes exclude the forward exchange cover. As noted, imports are priced on a country of origin basis. Therefore the exchange rates applied are impacted by the differences between the date of transaction (ownership change) and the shipping time from the country of origin to Australia.

14 The main pricing methodology used is specification pricing, under which a manageable sample of precisely specified products is selected, in consultation with each reporting business, for repeat pricing. In specifying the products, care is taken to ensure that they are fully defined in terms of all the characteristics which influence their transaction prices. As such, all the relevant technical characteristics need to be described (e.g. make, model, features) along with the unit of sale, type of packaging, conditions of sale (e.g. delivered, payment within 30 days), etc. The goods are also specified by country and market in order to lessen the impact of price variations attributable solely to changes over time in the mix of countries, or markets.

15 When the quality or specifications of an item being priced change over time, adjustments are made to the reported prices so that the index captures only pure price change. That is, any element of price change attributable to a change in quality is removed. If there is an increase (decrease) in the quality of an item, then the price index is adjusted downwards (upwards) to reflect the 'worth' of the quality change. This technique is known as pricing to constant quality.

16 Wherever possible, prices from volume selling products being traded with predominant countries, or markets, are obtained to ensure specifications have a good chance of being re-priced over time and index series are representative of overall price movements. Individual product weights and weights between markets and countries are regularly reviewed to keep the indexes up to date. The ABS has access to a rich source of international merchandise trade data and selectively uses average unit values in the export price index to augment specification pricing. Imported commodities are typically more stable in price, but non-homogenous in character and generally do not lend themselves to measurement by average unit value.


DIFFERENCES BETWEEN EPI AND EXPORT IPD

17 There are differences between the export price index (EPI) presented in this publication, and the export implicit price deflator (IPD) presented in National Income, Expenditure and Product (cat. no. 5206.0) and Balance of Payments and International Investment Position (cat. no. 5302.0). The differences are mainly due to the index methodology (fixed basket price index for the EPI, whereas the IPD is a quarterly weighted index, which includes price change and compositional change from period to period), the completeness of the dataset used and the source of the data. Further, the EPI is calculated from predominantly sampled businesses, whereas the export IPD is calculated from predominantly international merchandise trade data supplied by Customs. These differences can result in significant divergences between the measures when prices of commodities, which form a large proportion of exports, are volatile.


INDEX NUMBERS

18 Index numbers for financial years are simple averages of the relevant quarterly index numbers.


ANALYSIS OF INDEX CHANGES

19 Care should be exercised when interpreting quarter-to-quarter movements in the indexes as short-term movements do not necessarily indicate changes in trend.

20 Movements in indexes from one period to another can be expressed either as changes in 'index points' or as percentage changes. The following example illustrates the method of calculating index points changes and percentage changes between any two periods:

21 Export price index, All groups index number:

June quarter 2016 73.9 (see table 7)
less March quarter 2016 72.9 (see table 7)
Change in index points 1.0
Percentage change 1.0/72.9 x 100 = 1.4%

22 Tables 2 and 8 provide analyses of the contribution which SITC sections and divisions make to the All groups import price index and export price index, respectively. For example, imports of mineral fuels, lubricants and related materials contributed 9.7 index points to the All groups import price index number of 103.5 for the June quarter 2016 and +1.2 index points to the decrease of 1.0 index points between the March 2016 and June 2016 quarters.


FURTHER INFORMATION

23 For further information on price indexes in the ABS refer to the following publications:

Information Paper: Producer and International Trade Price Indexes; Concepts, Sources and Methods 2006 (cat. no. 6429.0)
Information Paper: Changes to Time Series Spreadsheets for Producer Price Indexes, Australia, Feb 2006 (cat. no. 6427.0.55.001)
Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002)
Information Paper: Review of the Producer and International Trade Price Indexes, 2011 (cat. no. 6427.0.55.003)
Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004)
Information Paper: Implementation of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.005)
Information Paper: An Analytical Framework for Price Indexes in Australia (cat. no. 6421.0)
Information Paper: Producer Price Index Developments (cat. no. 6422.0)
Information Paper: Review of the Import Price Index and Export Price Index, Australia (cat. no. 6424.0)
Information Paper: Price Indexes and The New Tax System (cat. no. 6425.0)

RELATED PUBLICATIONS

24 Users may also wish to refer to the following related publications, which are available from the ABS website:

Producer Price Indexes, Australia (cat. no. 6427.0)
Consumer Price Index, Australia (cat. no. 6401.0)
Wage Price Index, Australia (cat. no. 6345.0)
Australian National Accounts, Input-Output Tables (cat. no. 5209.0)
Balance of Payments and International Investment Position, Australia (cat. no. 5302.0)

25 Current publications and other products released by the ABS are listed on the ABS website <https://www.abs.gov.au>. The ABS also issues a daily Release Advice on the website which details products to be released in the week ahead.