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ICP Product List Regional Course on Price Statistics and ICP Jakarta, Indonesia 5-9 June 2006 TIMOTHY LO Statistician, International Comparison Program Asian Development Bank 1 The Regional Product List must be Representative & Comparable 2 Representativity A product list is representative if it accurately reflects the consumption behaviour of a society Representativity is the key principle for ICP groupings at basic heading level for the product list 3 Representativity A product is considered to be representative if: • It is widely available and/or • When it is a popular choice for the population in a certain country and accounts for a significant proportion of the expenditures within a BH • And by definition the product is included in the national CPI basket Note: representativity is achieved first at the BH level, then overall consumption will also be representative 4 Representativity • An item list achieves representativity if a sufficient number of representative products can be priced • Expert opinion is necessary to judge the representativity of an item. • During the formulation of the regional product list the national ICP statisticians were the experts consulted. • If representativity is low for a specific country, or a group of countries, but items are comparable, the resulting PPPs may be biased 5 Equi-Representativity An item is equi-representative, if it gives each participating country the chance to select a representative set of products Countries are not required to provide prices for an equal or similar number of items Therefore, the list is representative for each participating country and resulting PPPs are nonbiased 6 Equi-Representativity • If a regional product list is biased (less representative for some countries than others) it may lead to higher price levels for those countries finding only a small number of typical items. • To achieve representativity it requires: balanced item list use of representativity-signs (asterisk) 7 Representativity Tables The representativity tables shown in the link illustrates country responses to each product item. The participating countries in the region responded on the following principle (RAN): • “R” for products representative in their country • “A” for products available in their country • “N” for products not available in their country 8 Comparability Temporal and spatial comparisons Temporal 9 Spatial Compare items at same location at different points in time to measure the “change in prices” Compare items at different locations at a fixed point in time to measure “price levels” across space Reference: base period Reference: base country/region Example: CPI series, GDP at constant prices Example: ICP, regional price level comparisons Temporal vs Spatial What they have in common: • Both aim to “deflate” macroeconomic data to establish a common basis of comparison • Both aim to eliminate differences in prices which are an integral part of the nominal information & would otherwise confound comparisons 10 Temporal vs Spatial Comparisons Why they are different: • “Distances” to be bridged are different • Huge differences in prices and structures are the norm in spatial comparisons • Achieving comparability and representativity is more difficult in spatial comparisons 11 Representativity & Comparability Is a trade-off possible? • Yes, representative items in one country are likely to also be representative in countries with similar economies and cultures • Will require compromises - countries will have to be willing to change specifications to ensure comparability with other countries 12 Comparability The key principle - only compare like with like = 13 = Comparability How can it be achieved? •Detailed item descriptions •Inclusion of all relevant price determining characteristics •All deviations to be reported after price collections •Validation of price reports by NSOs to “clean“ the data 14 Comparability The quality of goods & services must be comparable when: their physical & economic characteristics are identical, or they are sufficiently similar that consumers are indifferent between them 15 Comparability If the principle of comparability is violated we have a meaningless number Dinner: 16 1 Rupee and 50 Baht PPP=1/50 Comparability - Quality When determining quality: • Technical parameters may be relevant: how they were produced what materials were used how they are physically constituted • Market related parameters may be relevant 17 Comparability - Quality Most important and typical determinants of quality 18 physical parameters market parameters material/composition brand size/weight shop type method of production location type of package seasonality Comparability - Quality Physical quality differences: • Durability • Precious materials used • Reliability • Extent of the finishing and craftsmanship • Comfort in handling (type of package) 19 Comparability - Quality Market differences: • Branded vs. Non-branded goods • Service related to the product • Risk and finance (quantity purchased) 20 Comparability - Brands • Brands are names given to products by the manufacturer to distinguish from similar products (competitors) on the market • Usually they have an image that is created & fostered by advertising, trying to convince consumers about their unique qualities 21 Comparability - Brands • Some branded goods may be more reliable & trustworthy than competing unbranded goods. • But this is not always the case from independent quality tests. • Branded goods tend to sell at higher prices; poorer consumers will purchase less branded goods. 22 Comparability – Brand Value • To the extent producers succeed in convincing consumers that their products are superior, the brand name itself has a value. • This is a market perception introduced by advertising. 23 Comparability – Brand Value • Differences in the brand value should be treated as quality differences. • Only products with the same or similar brand value should be compared directly. 24 Comparability – Brand Value An example of brand value: • Sony & Panasonic sell competitive products similar reputation & brand value. TV-sets of both brands (with the same technical performance) have similar prices. They might be internationally compared under one item code. • Whereas Samsung normally sells at lower prices than Sony or Panasonic. It must be treated as a separate item. 25 Comparability How to consider quality differences Need to gain knowledge about products: • detect all variants of a product • look for different prices for similar goods • find out the reasons for price differences Sources of information: • traders, catalogues of manufacturers, the internet, trade fairs, etc. 26 Comparability How to consider quality differences • Choose one or some of the product variants to be part of the list on the basis of pre-survey information. • Create a description where all the parameters making the difference are listed & determined, so that it is clear what variant is meant. • Deviations from the description in the country must be accounted for. 27 Comparability Other market differences Service related to the product • Major differences like installation of big durables, very special shop types (24 hour), free home delivery or special guarantees should be mentioned in the descriptions. Risk and finance (quantity purchased) • Bigger quantities put more risk (storage) & more finance requirements on the consumer, therefore they are usually sold at lower prices per unit. 28 Role of Product Lists • The lists of products are central to the ICP as it forms the basis of comparison in the region for the conduct of price surveys • Identifies clearly the items to be priced by the NSOs • Ensures that the products items priced are comparable • The product list contains representative items of all countries in the region • Each product can be identified by a unique product code. 29 Product List Development • ADB commissioned the ABS to establish the product list for Asia/Pacific • It is a gradual and iterative process involving continual interaction with each national statistical office • The list is based on the consumption patterns and markets within our region • All countries met to agree on the provisional draft specifications to finalise the choice of products to be priced 30 List Process • Regions assist in creating a global structured product list • Countries submit CPI or HBS file & weights to ADB • Basic heading & CPI/HBS item list with weights to reflect country consumption patterns • Countries in the region help prepare list of representative product specifications • Countries review list, suggesting additions & amendments • Revised list is prepared • Final list is agreed at workshop 31 Starting Point for the ICP Product List • GDP is the starting point for ICP • Expenditure on GDP is classified into 155 basic headings using 4 international classifications: COICOP for household expenditure COPNI for NPISH COFOG for government CPA/CPC for gross fixed capital formation 32 Basic Headings are the foundation • To develop the Asia Pacific regional list we start with the BHs • Basic Headings provide the framework for editing reported prices • PPPs are first calculated for BH before they are aggregated to higher levels for publication 33 Examples of basic headings: Food 110000 Individual consumption of households 110100.0 Food and non-alcoholic beverages Category 110110.0 Food Group 110111.0 Bread and cereals 34 Main aggregate Class 110111.1 Rice BH 110111.2 Other cereals, flour etc. BH 110111.3 Bread BH 110111.4 Other bakery products BH Structured Product Descriptions Structured product descriptions (SPDs) • a generalised way of describing products • specifies characteristics relevant to price • Describes all household final consumption items • SPDs will be used for the first time in ICP 2005 round • Improves comparability • Each region will use the same SPD list to derive a different list of tightly specified products 35 The Structured Product Description SPD Form Part 1 International Comparison of Prices Program - Structured Product Description ICP heading ICP cluster 11.01.11.1 01 Rice Rice FA031-01A Available in which type of establishments? Most representative estbalishments? Quantity and packaging Package type Jar Tin or can C2 Bag C1 Box Packet/envelope Basket C99 Other sold loose Designed for serving 36 Number of units in package Size of unit F99 Unit of Measure F99 Weight/ Volume Grams/Milliliters Kilograms/Liters The Structured Product Definition – SPD Form Part 2 Product characteristics (standard) Ty pe A1 A2 A3 A4 A5 Long grain Medium grain Short grain Not specified Combination other (specify) other (specify) Variet y B1 B2 B3 B4 B5 White Brown Combination Wild Arborio/risotto other (specify) other (specify) Preparation D1 D2 Pre-cooked/instant Uncooked other (specify) other (specify) Organic certification E1 E2 E99 yes no Product characteristics (others of regional importance) please specify other important product characteristics not listed under "standard", which are however regionally important. For rice it could be: Share of broken rice very low below 50% above 50% 37 The Structured Product Definition – SPD Form Part 3 Brand G99 Brands available at the markets Most representative brands Source/Destination Domestic Import Export Seasonal availability All year Jan Feb Mar Other comments K99 L99 M99 38 Apr May June July August September October November December Product Specifications • The generalised SPDs are used to identify specific products in each region • The specific products are tightly specified Each characteristic relevant to price Specified items must be representative • Once tightly specified, the product description is called a PS (product specification) 39 CPI vs ICP Product Specifications CPI 40 ICP “Open” product specifications “Tight” product specifications Price collector has the flexibility in selecting products to be priced. Price collector does not have the flexibility in selecting products to be priced. Country selects items to be priced Countries do not select items to be priced Matched Product Approach • The matched product approach used in both CPIs & the ICP requires the products whose prices are compared to be identical, or at least for consumers to be indifferent between them. • A ‘tight’ specification is one that has a precise and exhaustive list of its relevant or price determining characteristics. • The prices of products in different countries that fit the same tight specification should be “comparable”. 41 Loose Specifications • A loose specification can encompass different qualities of the same generic product. • Instead of requiring a particular characteristic to have a precise value, such as 70% cotton, it may lie within a certain range such as over 60 - 70% cotton. 42 Loose Product Specifications • If items are not specified well; price collector may not be collecting the same product across countries. • Loosely specific item products will cause errors in price collections • Price collectors may misunderstand PS - for example, glass of beer or a beer glass 43 Tight Product Specifications • The PS must be tight enough for price collector to correctly identify the same item across countries for comparability. • Enables price collectors from different countries to price same items ensuring comparability across the region. • However, too tight PS makes it difficult to find exact product & may not be available in the country. 44 Tight Product Specifications • Need for balance between tight specifications and the ability to find the product specified. • Number of observations must be adequate for matches within each BH for PPP aggregation. • Missing prices will not generate reliable set of PPPs at BH level. 45 Regional Product List • The HH consumption product list has 651 items. • The Non-HH product list is composed of government; construction; equipment; & health (treated separately) 46 Thank You! 47