Compiling price indexes

Generally, there are three kinds of product price indexes for a given industry. Firstly, primary indexes that show changes in prices received by producers in the industry for products made primarily, but not necessarily exclusively, by that industry. The industry within which a producer is classified is determined by those products that account for the largest share of the company's total value of shipments. Secondly, many industries have secondary product indexes that show changes in prices received by producers in the industry for products made chiefly in some other industry. Finally, some industries may have miscellaneous product indexes to show price changes in other sources of revenue received by producers within the industry.

A key philosophy of price index design for the Producer and International Trade Price Indexes is to re-use components to maximise the utility of collected data. One mechanism that helps achieve this aim is through the construction of secondary indexes. The preceding sections have described how elementary aggregate price indexes can be combined to produce higher level indexes. The particular combination of elementary aggregates is determined by the underlying classification of the price index.

However, a given elementary aggregate may be classified in multiple ways. Reclassifying elementary aggregates according to a different aggregation structure results in a secondary index. The relationship between the original primary source index and the secondary index is marked by two important features. First, the elementary aggregates for the secondary index are the same as those in the primary source index, having the same P-indexes and value aggregate data.

Second, the primary source index and the secondary index are identical at the root or top level of the index. The indexes only differ at the intermediate levels (between the root and the elementary aggregates), since a secondary index is defined through the different aggregation structure.

Frequent use of secondary indexes occurs within the International Trade Price Indexes, with classification by both Standard International Trade Classification and Broad Economic Categories.

An example of a secondary index is provided in Table 4.3. This example uses a reclassification of the elementary aggregates presented in Table 4.2, with emphasis on type of product rather than the domestic or imported split.

The key feature of secondary indexes is that they rearrange the existing basic building blocks of the price index along a different compilation structure, and in doing so retain both the price movements and underlying value aggregates of the elementary aggregates.