Use of Price Indexes

The Producer and International Trade Price Indexes are used to deflate values of a number of components in the Australian National Accounts, including industry inputs and outputs, sales, capital expenditure and inventory data to produce chain volume measures. The deflation process is integral to the compilation of Gross Domestic Product and its components. In addition, International Trade Price Indexes are used in the compilation of Balance of Payments Chain Volume Measures.

Price deflation is achieved by dividing the current price value for a period (quarter or year) by a measure of the price component (usually in the form of a price index) for the same period. This technique re-values the current price value in the prices of a base period (in the Australian volume measures this is generally the previous year)¹.

Revaluation of the current period values using earlier period prices is defined in the following format:

\(\frac{V^t}{\big(\frac{P^t}{P^{t-1}}\big)}=P^{t-1}Q^t\)

  \(\Delta Q=\frac{P^{t-1}Q^t}{P^{t-1}Q^{t-1}}\)

Where \(V\) refers to value, \(P\) refers to price, \(Q\) refers to quantity (or in National Accounts terminology, volume), and the superscripts \(t \space t-1\) refer to current and previous periods respectively.

More information on the use of price indexes in the production of the Australian National Accounts can be found through the following sources:

• Australian System of National Accounts: Concepts, Sources and Methods.
• Information Paper: Australian National Accounts, Introduction of Chain Volume and Price Indexes.