Deriving elemental volume estimates

6.43     Chain volume estimates are derived by aggregating volume estimates of components at the elemental level; that is, the lowest level at which volume estimates are derived. The level of detail of each element that is aggregated is dependent on the availability of appropriate and high-quality current price and price index or quantity information. The following describes the two basic approaches taken to derive elemental volume estimates, quantity revaluation and price deflation.

6.44    The first approach uses quantity data to derive constant price estimates (tonnes, litres, etc.). For an individual product, the estimate of quantity in each period is multiplied by the price per unit of volume (or average unit value) in some base year. This method, referred to as quantity revaluation, can only be applied to produce estimates of reasonable quality if the product is defined narrowly enough to ensure that it is homogeneous in content and free from quality change over time (since a change in quality is defined as a change in volumes rather than as a change in price). Quantity revaluation is at times the preferred approach to obtain a volume estimate, if there is no directly observable market price for a good or service.

6.45    The second approach to obtaining volume estimates is referred to as price deflation. A measure of the price component of the current price value is obtained (usually in the form of a price index) and is divided into the current price value in order to re-value it in the prices of the previous year.  This also allows for the price effect to be isolated from the volume effect – as both price and volume are implicit in a current price value.

6.46    Price deflation is the most commonly used method, largely because most macroeconomic statistics are available only as dollar values, and the very detailed quantity data required for quantity revaluation are unavailable. However, there are also advantages in using price deflation in circumstances where it may be possible to employ either approach. Relative price movements are normally more highly correlated between products and between industries than are relative quantity movements. Therefore, an adequate indicator of price movement can generally be obtained with less data than are required to obtain an equally adequate indicator of quantity movement. There are two other main advantages in using price deflation as opposed to quantity revaluation:

• in compiling price indexes, specific attention can be given more readily to excluding changes that are attributable to quality change; hence, ensuring that any quality changes that do occur are automatically reflected as volume changes; and
• if directly relevant price or quantity data are not available to isolate the price and volume effect from a current price value, then the proxy price movements of related products will usually be more accurate indicators than proxy quantity movements.

6.47    In compiling its price indexes, the ABS ensures that as far as practicable they reflect 'pure' price change. When a change in specification of a good or service occurs, any change in price attributable to the change in specification is isolated and excluded where possible. By isolating the ‘pure’ price change in this way, when the price index is applied to a current price value to derive a volume, the volume will reflect both quality and quantity changes. To the extent that this is achieved, the resulting volume estimates reflect improvements (or degradations) in products. For details of how the ABS deals with specification changes in compiling its price indexes, refer to Consumer Price Index: Concepts, Sources and Methods.

6.48    In many cases, the deflator is a fixed-weighted (i.e. the weights used to combine the constituent price indexes are not changed frequently) combination of lower level price indexes. In those cases where both the price and quantity relativities of the constituents of a current price value to be deflated are changing quickly, it is important to construct chain price indexes that are re-weighted frequently. In those cases where price and quantity relativities are not changing rapidly, reweighting is undertaken less frequently. In any case, the ABS aims to deflate at the most disaggregated level practicable.

6.49    Where current price figures are only available at quite an aggregate level, but more detailed prices are available for components, then it is preferable to attempt a disaggregation of the total and deflate the components with the separate price series, rather than deflating at the level of the total using a fixed-weighted deflator. This is to ensure that the detailed level data are built up to their aggregate counterparts, to allow for in-depth and pointed information about products or services to be included in the broader estimates to which they are relevant. A variation on this approach is to use a model to decompose the current price aggregate, deflate the components and then create a Paasche price index from the aggregate current price and volume data. This method is used to deflate quarterly current price estimates of gross fixed capital formation (GFCF) of equipment, which are only available at an aggregate level. A product-flow model is created by using information from the latest annual S-U tables to weight together current quarter manufacturing output and foreign trade data to produce estimates of GFCF of equipment by detailed category. These are deflated using appropriate price indexes and then aggregated and divided into the corresponding current price aggregate to produce a Paasche price index for GFCF of equipment.

6.50    As far as possible the price indexes used for deflation should be on the same valuation basis as the current price data: for example, at basic prices for outputs and purchasers’ prices for final and intermediate expenditures. If a price index with an inappropriate valuation has to be used, then the ABS’s national accounts compilers must ensure that suitable adjustments are made if an event occurs that invalidates the assumption that the price index is a suitable proxy.