The volume and complexity of the available transactions from which to obtain prices means that it is not possible to collect prices from every provider and for every product or to take into account every price at which products are sold. Consequently, it is necessary to adopt a sampling approach to obtain transaction prices for representative products from selected businesses.
This section will provide a broad overview of sampling methods used by the ABS in the compilation of the Producer and International Trade Price Indexes.
There are two primary sampling methods used by the ABS:
Probability sampling
Probability sampling is the selection of a sample of producers and products from a population of industrial activity in which each producer and product has a known chance of selection. Under this approach, all producers and products have a known probability (chance) of inclusion in the sample. The key benefits of probability sampling are that sampling design controls for sampling error and allows for its measurement. There are, however, disadvantages associated with this approach.
The use of probability sampling requires identification of all units (e.g. producers and products) in all industries of the economy that are in-scope of the price index (known as the sampling universe). This requirement translates into the need for an up to date sampling frame of products. The practical difficulties in satisfying this requirement mean that there are high costs in the design, implementation, and ongoing administration of probability samples for price index purposes.
Non-probability sampling
Non-probability sampling is known as judgmental or purposive sampling, or expert choice, and samples are chosen by experts to be representative. In a price indexes context this involves index compilers selecting producers and products from which to obtain prices using available information on the relative importance of individual producers and products.
A key benefit of non-probability sampling is that it can be used where the sample population is not known. However, it is not possible to produce a measure of sampling error for indexes compiled from non-probability samples. It is generally accepted that price indexes are an area of statistics where the risks in not using a probability sample are relatively low, as the diversity of price change charged by various producers over time is usually small.¹
Non-probability sampling is used by the ABS to compile the Producer and International Trade Price Indexes.² This is primarily due to the lack of available data to undertake a probability sampling approach, which as explained above, requires a significant data sampling frame of products which is not available to the ABS.
The non-probability sampling approach uses available data to build a picture of the overall market for a particular industry. It is used to determine who the potential providers are, their relative importance, what particular products they sell, who they sell to, and their pricing policies. A range of information sources are used in the selection of products and corresponding businesses. These include market reports, industry associations, ABS industry census data and other related surveys, and discussions with potential providers. This information is used to develop a comprehensive understanding of the market.
The index compiler uses this information to make appropriate judgements in the sample selection process.
The effectiveness of the non-probability sampling approach depends on the index compiler’s ability to construct product samples that produce price movements that are representative of price movements of all in-scope products. This is achieved by:
The Survey of Producer Prices is the authorised survey tool administered by the ABS to collect the pricing data used in the compilation of the Producer and International Trade Price Indexes.
The Survey of Producer Prices collects pricing data, reasons for price movements, and details regarding changes in product characteristics from producers that are enrolled within the survey. Enrolment into the survey is done on purposive basis and requires additional information regarding sales data, purchasing information to gauge representativeness and contact details for persons responsible for pricing information.
The Survey of Producer Prices administered by the ABS meets the confidentiality requirements of the Census and Statistics Act by ensuring that information provided to the ABS is:
Further information on how the ABS keeps information confidential is available in the ABS Privacy Policy and the Survey Participant Information - How The ABS Keeps Your Information Confidential.
The choice of individual products to be priced is made in consultation with providers to the Survey of Producer Prices. This process ensures that the sampled products are clearly identified and described, that they are representative of the price behaviour of the products they represent and confirms that the product specifications will be available for pricing in future periods.
The representivity of the products in the price basket is regularly reassessed as over time specific types of products in the price basket appear and disappear. New products can appear because technical progress makes production of new products possible. Existing products often decrease in importance or disappear from the market altogether as new products appear.
The forms for the Survey of Producer Prices are tailored specifically for each provider. The products priced and the descriptions of these products are tailored to individual providers and this process minimises the survey burden placed upon providers.
A price observation is the price of a specific product at a given point in time. To ensure consistency in the final index, a price observation should compare “like with like” in each different collection period. Product specifications are defined as tightly as possible so that the prices collected for a particular product can be compared from period to period and any changes in product specification characteristics (quality) can be identified. Further, the collection of additional information, or collecting data on a different pricing basis, allows the pricing data to be used in multiple ways. This re-use of price data is considered a mechanism whereby the ABS maximises the utility of collected pricing data. Describing a specification in this way also assists the adjustment of the price associated with any changes in the product quality or the terms and condition of sale.
The main criteria that form part of a specification are listed in Table 3.6 Below.
| Item | Detail |
|---|---|
| Product name & serial number | Name of the product/service. This should include information about the model/product range of the product/service. |
| Description | In addition to the product/service name, details. enhancements, add-ons need to be included in the description. For example, with cars, a number of add-on options are usually available (metallic paint, sun-roof, leather seats, non-standard alloy wheels), all of which affect the functionality/price of the product/service. |
| Size of transaction (quantity data) | The amount (quantity) of products/services sold, and whether volume discounts apply. |
| Class of Customer | Some companies may have different pricing structures for different customers (for example, trade discounts). A unique customer identifier can be used for customer confidentiality. |
| Units of sale | Units used in describing the product (for example, kilograms, litres, box for x amount etc). |
| Discounts | Many companies offer trade, volume, competitive, or preferred customer discounts. All applicable discounts should be described, including value of the discount. |
| Transport terms | Whether transport costs are included and a description of how the products will be collected or delivered. |
| Currency | Currency the transaction will be traded in. |
| Price | Price of the product/service |
For some industries, a specification for a particular product may not be appropriate, and alternative pricing methods are required, these are explained below.
The Survey of Producer Prices primarily uses a webform based tailored survey questionnaire.
Webforms provide a quick, easy and secure way to complete and submit survey data.
While the ABS sources the majority of its pricing data for the Producer and International Trade Price Indexes from the Survey of Producer Prices, other data sources are used to supplement the quarterly price collection.
Compilation of the Producer and International Trade Price Indexes uses data from other internal ABS sources in addition to that collected in quarterly survey forms.
The ABS also uses data that are readily available in the public domain, such as exchange rates, and some commodity data.
In addition, the ABS sources data from other Australian Government agencies (particularly for mineral fuels and some agricultural products). In the cases where internet prices reflect actual transaction prices the ABS will use this data to supplement its price samples. In some cases, the ABS purchases data from third parties, particularly when measurement of prices for groups of products requires additional specialist skills, such as bills of quantity data produced by quantity surveyors for the Outputs of the construction industry Producer Price Indexes.
Most individual products priced in the Producer and International Trade Price Indexes are priced once per quarter, using a point-in-time pricing mechanism. However, pricing occurs more frequently for products that exhibit volatile price behaviour. In such cases, collections are carried out monthly or even more frequently (for example, a series of daily commodity spot prices are collected.
The usual practice is to collect prices from all providers in each pricing period. However, there may be some cases where prices are generally stable, products take a long time to produce, or price changes happen at predetermined times. In these cases, it is not necessary to collect prices in every reference period. For example, education prices increases occur annually, hence prices are collected once a year.
Point-in-time prices relate to the price of a product on a particular day of the period (for example, the first day of the month, the nearest trading day to the fifteenth day of the month, middle day of the quarter). This approach makes the collection date straightforward for both the ABS and providers and means that comparisons from period to period will be consistent.
To mitigate short-term external influences (for example, extreme weather, labour stoppages, seasonality), the ABS spreads the pricing points to different positions over the 13 weeks of the reference quarter. This approach ensures the price of a particular product is observed at more than one point in time during the pricing period.
There are many different pricing types collected by the ABS through the Survey of Producer Prices and this section will explore the different pricing types currently in scope of the Producer and International Trade Price Indexes.
Transaction Prices
A transaction price is the value placed on an item (agreed upon by seller and buyer) at the point of transaction. It must reflect the actual prices paid to or received from producers after taking into account all discounts applied to the transaction whether they be volume discounts, settlement discounts or competitive price cutting discounts which are likely to fluctuate with market conditions.
The Producer and International Trade Prices attempt to measure actual transaction prices for the exchange of products. The price includes the impact of all discounts, surcharges, rebates, etc. for a unique customer or unique class of customer. It is not always possible to obtain a transaction price net of all discounts and inclusive of all surcharges. Care is taken to secure a type of price with a movement which closely proxies actual transaction prices.
Contract Prices
Contract pricing generally refers to a written sales instrument that specifies both the price and shipment terms. The contract may include arrangements for a single shipment or multiple shipments. The contract usually covers a period in excess of one quarter. Contracts are often unique in that not all the price-determining characteristics in one contract can be expected to be repeated exactly in any other contract. The challenge is to maintain a constant quality over time, especially when the contract expires and selection of a replacement product is necessary.
Contract terms may be unique to each agreement in terms of customised product features, negotiated price tied to the unique buyer/seller relationship, or quantity differences. In addition, contracts reflect supply and demand conditions at the time of entering into the contract. To maintain an accurate index where contract pricing is widespread, the ABS employs larger samples. This is to reflect the proper proportion of new contracts or renegotiated contracts being entered into in each pricing period.
Spot Market Prices
Spot market pricing (or simply spot price) may be defined as any short-term sales agreement. Generally, this refers to single-shipment orders with delivery expected in less than one month. Products sold on this basis are usually off-the-shelf and, therefore, are not subject to any customisation. These prices may be subject to discounting and directly reflect current market conditions. Spot market prices can be extremely volatile; in the case where this volatility is not experienced in actual transactions, the ABS adopts pricing methodologies that minimise this spot price volatility. For example, for crude petroleum oils, the ABS incorporate an average of daily prices into the price measurement for each period. Another solution the ABS adopts for homogeneous products that exhibit price volatility is to use average unit values.
Average Unit Values
Average unit values (or simply average prices) reflect multiple shipments of a given product within a consistently defined period, for which data are usually readily available. The advantage of average unit values is that they effectively increase the number of price observations used to calculate the index, thereby reducing sample variance. The reduction in variance is achieved because average unit values explicitly represent the entire population of transactions for a particular product, and so the concern when pricing a handful of single transactions does not apply. An average unit value does not take into account constant quality and is therefore used selectively.
Counterpart Pricing
Counterpart pricing is a term to reflect utilisation of a transaction price observed on a pricing basis that differs from the conceptual basis of the price index. For example, consider an input price index that measures the price of plumbing products purchased by builders for use in house construction. The conceptual basis for such a price index is to measure the purchasers’ price paid by the builder, inclusive of delivery charges. A counterpart price for this transaction would be the price received by the producer of the plumbing products; that is, the basic price. This basic price would differ from that paid by the builder in this case due to delivery costs. The counterpart pricing methodology is employed whenever a purchaser’s price is represented by a basic price, or vice versa.
Please note that the use of a counterpart pricing methodology has the implicit assumption that transport and distributive trade margins move proportionally with the basic price.
Model Pricing
Model pricing is an approach adopted to measure products that are unique in nature, i.e. a product that is only manufactured once to the specification of a customer. The model pricing approach defines a notional product (the model) that is to be priced over time. The circumstances that dictate the use of model pricing mean that the products are themselves unique, and frequently the products provided are complex in nature.
Transfer Pricing
Transfer prices are the prices adopted for bookkeeping purposes between affiliated enterprises under common management and may not correspond to prices that would be charged to independent parties. Affiliated enterprise may set the prices of transactions among themselves artificially high or low in order to affect an unspecified income payment or capital transfer.
Please refer below for issues relating to transfer pricing.
The appropriate price to obtain from a theoretical perspective should be the price at the time there is a change in ownership from the producer to the buyer. Unfortunately, it is frequently difficult to adhere to this theoretical requirement uniformly in practice. Therefore, the ABS generally use the concept of shipment price for the actual transaction occurring as close to the survey pricing date as possible. In most circumstances, the shipment price is final at the time of delivery to the customer.
An important caveat is made for the Import Price Index in this case (see below).
The Import Price Index measures the price of merchandise that is imported into Australia. A transaction is in scope of the Import Price Index if the merchandise crosses the Australian customs frontier during the reference period. However, that transaction, and hence the change of ownership, may have occurred prior to the reference period, with the difference in timing due to shipping times. For example, a shipment of cars may change ownership during the last week in March, but not arrive in Australia until early in April. In this instance, although the change of ownership occurred in the March quarter, the price measurement would be included in the June quarter Import Price Index.
This crossing customs frontier basis is the same as that adopted for Australian International Merchandise Trade statistics. It slightly differs from the conceptual bases of both the Australian National Accounts and Balance of Payments statistics. However, since both the Australian National Accounts and the Balance of Payments data use international trade data as a source, the data sets are consistent in practice. Adjustments for timing are made to the Australian National Accounts and the Balance of Payments in the case of large one-off purchases, typically of capital goods (for example, the purchase of a fleet of jet aircraft). Since by its very nature the Import Price Index cannot determine a price movement for one-off purchases, the Import Price Index is consistent with the compilation of both the Australian National Accounts and the Balance of Payments statistics.
The identification of discounts is complicated in practice by a number of factors.
The pricing structure used by the company may be complex and the conditions under which discounts apply may be described in non-standard terms. Differences in pricing and discounting procedures between companies require data collection to be tailored to each company and the full level of discounts offered to major customers may only be known to senior company officials.
In clearly identifying discounts, it is convenient to classify the discounts into two categories: recurring discounts, and non-recurring discounts.
Recurring discounts generally reflect cost savings to the buyer and are generally on-going, recurring every time a sale is made that meets specified conditions. The most common types of discounts fall into this category (e.g. discounts based on type of customer, volume discounts, settlement discounts).
Non-recurring discounts are discounts that reflect the bargaining power of the buyer vis-a-vis the seller and/or current market conditions. This category includes various forms of competitive discounts (including those that appear in the guise of short-term changes to specific classes of customer and other recurring discounts).
Discounts are frequently commercially sensitive information. For example, knowledge of competitors’ discounts with major customers (or major suppliers) is of enormous commercial value; in other cases, such information may have significant public relations or political impacts.
Examples of discounting practises are:
The use of a personal interview and subsequent design of the questions in the Survey of Producer Prices allows the ABS to determine the current and likely future use of the discount practises described above, and to emphasise the importance of notifying the ABS of any change in, or future use of discounts (including non-recurring discounts).
Operational procedures for processing the Survey of Producer Prices, especially data editing and querying of providers, also focus on identifying changes in discounts and pricing policies.
There are a number of additional sources of information that are useful in revealing the existence of (or changes to) discounts:
In the case of volume discounts, the same customer may face varying prices for the same product purchased in consecutive periods, because different volumes are purchased in the two periods. In circumstances such as this, the unit price will vary simply because the volume of sales has changed rather than because of a change in the underlying price of the product. If it is determined that this is a typical occurrence for a particular product, the specification of the item will usually identify a certain volume for pricing purposes. That volume is then priced in each pricing period.
Also related to volume discounting is the common occurrence of providing a larger quantity of the product for the same price, sometimes for a limited period. Again, to ensure that price changes are correctly included in the price index, quantity details are also collected.
The overarching principle in the ongoing identification of discounts so that they may be correctly included in the final transaction price, is to record list price and discount as separate data items. In this manner, it is far more likely that a change in discount is correctly observed in calculation of the final transaction price.
A rebate is a type of discount where the discount is paid after the purchase and is normally based on the cumulative value of purchases over a specified time.
Rebates in price indexes pose major practical problems in that they are often determined by future events. For example, the buyer receives a rebate at the end of the financial year based on how much was purchased in the year. Thus, at the start of the year, while it is known that the buyer will receive a rebate, the precise amount is unknown. The particular problem posed by rebates of this sort is that the final price to be paid will not be known until after the end of the period concerned. This type of rebate is often referred to as a retrospective price fall.
The situation is often further complicated by the rebate being paid to the buyer in the form of a reduction in the cost of their purchase in a particular period. That is, the total rebate for all purchases in a previous year is applied to the price of purchases in a particular period. This practice results in a large price fall in the period in which it is applied.
Where the rebate is already in existence the rebate should be treated as a discount and deducted from the quarterly price, and not treated as retrospective price reductions. The basis for calculating the rebate should be the buyer's normal volume of purchases (if the buyer is a new customer then the basis for calculating the rebate should be the average quantity purchased by that category of buyer).
Changes in the level of rebates should only be reflected where the actual rebate for the same quantity purchased or sold changes. Changes in the rebates paid to a particular customer due to the customer changing their volume of purchases should not be reflected as price changes.
The rebate collected should be the rebate applicable to constant quantity and clearly detailed in the pricing specification.
Where rebates are specified in terms of monetary value of purchases it is important to realise that due to inflation, a monetary value does not represent a constant real quantity. As per the discussion above for discounts, any monetary values should be converted to quantity data.
If the quantity of a provider's sales changes significantly, the pricing specification should be changed to reflect this. The change in rebate associated with a change in volume should not affect the index.
Where a number of levels of rebates are offered it is necessary to ascertain the importance of each level of rebate and to price those that are significant.
On occasions rebates will be introduced retrospectively, that is a supplier introduces rebates based on a previous financial year’s purchases. Two types of practises arise here. The first practise is where prices for previous periods are amended prior to settlement. The second practise is where prices for a particular subsequent period are themselves amended to reflect price changes for earlier periods.
Example: consider a manufacturer of steel shelving who purchases sheets of stainless steel as a material input. This particular producer is offered a rebate of 5% if he buys more than 2000 tonnes in a calendar year. His purchasing data appear as follows:
Example below: Purchases of stainless steel
| Reference Period | Price | Quantity | Value | % change in price from previous quarter |
|---|---|---|---|---|
| Year 1(T) | $ per tonne | tonnes | $'000 | % |
| Quarter 1 | 380 | 570 | 216.6 | |
| Quarter 2 | 420 | 590 | 247.8 | 10.5 |
| Quarter 3 | 460 | 560 | 257.6 | 9.5 |
| Quarter 4 | 510 | 590 | 300.9 | 10.9 |
| Total | 2 310 | 1 022.9 |
The producer exceeds 2000 tonnes purchased within the calendar year, and his supplier provides a 5% rebate for the year's purchases. This amounts to 5% of $1.0229 million dollars, or $51,145. The supplier provides this rebate by deducting this value from the quarter 1 of Year 2's total purchases.
| Reference Period | Price | Quantity | Value | % change in price from previous quarter |
|---|---|---|---|---|
| Year 2 (T+1) | $ per tonne | tonnes | $'000 | % |
| Quarter 1 | 560 | 660 | 369.6 | |
| Quarter 1 (with rebate) | 318,455/660 = 482.5 | 660 | 369.6-51.145 = 318.455 | -5.4 |
| Quarter 2 | 610 | 660 | 402.6 | 26.4 |
In the Producer and International Trade Price Indexes, the rebate is shown in the quarter in which it is applied, resulting in a substantial price fall in quarter 1 of Year 2 and substantial offsetting price rise in quarter 2 of Year 2.
There are two reasons for this practice, stemming from the concept that the indexes measure the prices applying in a particular quarter:
A unique product is a product that is only manufactured once to the specification of a customer. Within a group of products, each product will be different from the others, for example, industrial furnaces, ships and architectural services. In these cases, the price cannot be observed over future reporting periods.
The solution to this problem is based on the concept that products are a collection or bundle of different characteristics. For example, a ship can be considered as consisting of steel, engine components, navigational equipment, and so forth; an architectural service may consist of different numbers of hours of senior and junior architects’ time together with associated information technology and other materials. The challenge is to define a product in terms of its characteristics, and then determine a real price for that product in future periods even if such a product is not actually sold. This approach is called model pricing.
The model pricing approach defines a notional product (the model) that is to be priced over time. The circumstances that dictate the use of model pricing mean that the products are themselves unique, and frequently the products provided are complex in nature.
There are several techniques that may be used in identifying and describing a notional product. All such approaches require a high degree of interaction and cooperation with data providers, and these approaches are individually tailored to providers:
A limitation of the model pricing approach is that the specified product must continue to be representative of the types of products being produced. This means that the notional model must be frequently checked for representativeness and updated and re-specified over time.
The ABS works with producers of unique products to apply price collection procedures that yield the correct price movement with the least burden placed on providers.
There are several techniques to repeatedly price these notional models:
a. provider algorithm: in this case the provider agrees to collect prices for individual components and combines the price to one final price.
b. ABS algorithm: in this case the provider agrees to report prices for individual components only, and the prices are combined to a final price by the ABS.
The ABS regularly re-visits providers who supply data using model pricing. These visits re-emphasise the importance of model pricing and are an opportunity to update the product specification for model pricing.
Transfer prices should be used with caution because transactions to another part of the same business (or to an affiliated business) may not reflect the true price (or true price movements) otherwise observed in the marketplace. The ABS only include a transfer price in the Producer and International Trade Prices when the price behaviour is confirmed to represent true market transactions.
Where the parties to the transactions are between affiliated enterprises in different countries, the prices adopted in their books for recording transactions in products may not correspond to prices that would be charged to independent parties. Transfer pricing to avoid tax is illegal in Australia, and consequently the distortions in economic statistics caused by transfer pricing through the customs frontier are not considered widespread. For these reasons, transfer prices are sometimes included in the Import Price Index and Export Price Index. This practice is consistent with the practical treatment of these value data (for merchandise crossing the customs frontier) in both the Australian System of National Accounts and the Balance of Payments and International Investment Position Manual Sixth Edition, frameworks.
02 February 2024