Workshop on Price Index Compilation Issues February 23-27, 2015 Market Basket Items and Weights Gefinor Rotana Hotel, Beirut, Lebanon

February 23-27, 2015 Sources of Weights: 2 Discussion Outline Introduction Household Budget Surveys Scope and Coverage of Household Budget Surveys Using Household Budget Surveys in the Construction of the CPI Weights in the PPI Updating Weights to Align with Base Period Prices METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 3 Scope and Coverage of Household Budget Surveys Main Objectives of Household budget surveys (HBS) HBS place emphasis on collecting data relating to household expenditures for goods and services used in day-to-day living. Information on the source and amount and sources of household income, demographic and economic characteristics of household members are also collected. METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 4 Scope and Coverage of Household Budget Surveys The main objectives of a HBS are to provide for: construction of a new system of weights for an updated CPI ** improvement of household sector estimates in the national accounts reliable estimates of income distribution among households METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 5 Using the HBS to construct a CPI Deriving CPI weights from the HBS results The CPI measures pure price change in a fixed market basket of constant quantity and quality. The weights used for the CPI compilation are the relative consumption expenditures’ shares of the different items in the basket. The HBS is usually the main source of data in deriving the CPI weights. METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 6 Using the HBS to construct a CPI Before deriving the weights, the expenditure figures from the HBS should be compared with sales, production and import data for the reference period. Any suspicious differences should be removed (e.g., alcohol, tobacco, firewood). METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 7 Using the HBS to construct a CPI Convert the HBS expenditure concept (how households spend their money) into the CPI final consumption concept (what households consume) In the CPI, consumption refers to acquisition, i.e. to the value of the goods and services which households purchase at the time those goods or services are actually acquired. No attention is paid to the timing of the actual money payments or when the commodity is consumed. METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 8 Using the HBS to construct a CPI Important to remember that an HBS is a sample survey so results are subject to sample errors These may lead to ad hoc adjustments at regional levels (e.g. car purchases) Look at country data…….. METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 9 Weights in the PPI Which weights should be used in the PPI? Sources of Weights Obtaining Weights for Each Observation METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 10 Updating Weights to Align with Base Prices If the base price reference period and the weight period are the same, no adjustment is necessary If they differ, then the weights should be updated to reflect price change between the weight period and the base price reference period To keep implicit quantity weights fixed, the base price period and the weight period must reflect the same price levels METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 11 Updating Weights to Align with Base Prices This can be accomplished by multiplying the source period weights by the ratio of the base period price to the average price of the weight period For example, if the source weights represent output for 2012 and we want the base price period to be December 2014, we would multiply the 2012 output by the ratio of the December 2014 price to the average price during 2012 METAC and IMF Statistics Dept.

February 23-27, 2015 Sources of Weights: 12 Updating Weights to Align with Base Prices The current price, the base price, and the index weights are now available to begin index computation If a standard Laspeyres method is used, the current price is compared directly with the base price and multiplied by the updated weights in the calculation If a modified Laspeyres method is used, the prices for each period (beginning with the first period following the base period) are compared to the previous period and multiplied by the previous period index. METAC and IMF Statistics Dept.