1. Price and Volume Measures

2. Money and prices
The value of flows and stocks is measured in monetary units
Different types of stocks and flows:
Transactions in products (P)
Distributive transactions (D)
Financial transactions (F)
Value is price times amount V = P x Q

3. Different categories of prices
In the production account
Output and value added are valued at basic prices
Before product and production taxes, and margins
Subsequent account entries are valued at purchasers’ prices

4. Basic prices
The basic price is the price of a unit of output before net taxes on the product (D.21 less D.31)
It excludes any transport charges invoiced separately by the producer.
It does not include wholesale and retail margins
It does include D.29 less D.39 : Other taxes less subsidies on production. (e.g. local business property tax)

5. Purchasers prices
The purchaser’s price is the price the final purchaser pays for the product.
It includes taxes less subsidies on the products and transport charges paid separately by the purchaser.
It includes the margins of wholesalers and retailers

6. Relation of basic to purchaser prices
Purchaser’s price = basic price
plus net product taxes (D.21-D31)
plus transport invoiced by seller
plus retail and wholesale margins

7. Value, quantity and price
Value, price and quantity are linked by the fundamental equation:
This equation is valid only for homogeneous products

8. Homogeneous products (1)
Homogeneous products are products for which it is possible to define units which are all considered equivalent and which can thus be exchanged for the same monetary value
It is thus possible to define the price of a homogeneous product as the amount of money for which each product unit can be exchanged
A homogeneous product consists of units of the same quality
To value the production of a good, it is necessary to find equivalent goods actually sold at the time as it is produced, this is only possible for homogeneous goods

9. Quality quality reflects the characteristics of a product
Products are of the same quality if they correspond to the same homogeneous product
Differences in quality reflect:
Physical characteristics;
Deliveries in different locations;
Deliveries at different times;
Differences in conditions, circumstances, environment of sale

10. Volume
Measuring economic growth in volume terms over time is a key measure of a national economy
This requires the value change in measures such as GDP to be broken down into price change and “real” change ie a volume change
Volume change is a measure of the change in aggregate product quantities

11. Comparing base and current periods
The value of a set of products in the current period is:
Where exponent 1 refers to the current period and index i to a specific product
The volume can be defined as:
The volume index is:

12. Price index and volume index
It is possible to define a price index using the equation
v = p x q
Value index = price index x volume index
Price index = value index / volume index
In theory, the volume index form should be Laspeyres indices and price indices should be Paasche.

13. Volume indices The Laspeyres philosophy
time periods 0 and t
quantity (volume) relatives qt/q0
weights : share in total value of period 0
Laspeyres volume index
(arithmetic mean of quantity relatives)

14. Price indices The Laspeyres philosophy
time periods 0 and t
price relatives pt/p0
weights of period 0
Laspeyres price index

15. Chaining
No fixed base year but moving base year: always use weights of previous year to calculate growth rates
Chain year-on-year growth rates together to obtain “constant price” data
Commission Decision requires chaining using Laspeyres method
Non-additivity will occur in “constant price” series

16. Base and reference period
Base period
the period that provides the weights for the index
Reference period
the period for which the index has the value 100

17. Price indices in practice
CPIs (HICP), PPIs: all Laspeyres price indices
Define precise bundle of goods and services & obtain their value shares in base year (for weighting)
Observe monthly prices, by going to shops, magazines, internet, etc.
Calculate index

18. New products (1)
The method of calculating price and volume indices assumes that the products exist in both successive years
For new products there is no immediate comparison with a previous year

19. New products (2)
There are to types of approaches for estimating the price of the previous year:
The first supposes that the price of the new product changes like the price of similar products
The second attempts to calculate directly what the price of the new product would have been if it had existed in the base period

20. New products
The first approach amounts simply to using a price index calculated on the basis of a sample of homogeneous products existing in both successive years
Which the second approach, the methods which are more commonly used are the hedonic method and the input method

21. Example of a new product
New television – Not a tube, but an LED display
Calculate relationship between price and characteristics on old sets
Feed in new characteristic
Estimate an “old price” for the previous year using hedonic techniques

22. Volume of value added Best method in theory: double deflation
This requires output and intermediate consumption to be deflated separately to produce Laspeyres style estimates of volume change
Value added can then be derived as the difference
Alternative method used in practice for early measures of growth: single deflation

23. Non-market services (1)
Non-market services are not sold at a market price and their value at current prices is calculated as the sum of the costs incurred
Those costs are: intermediate consumption, compensation of employees, other taxes less subsidies on production and consumption of fixed capital
The unit cost of a non-market service can be considered as the equivalent of the price

24. Non-market services (2)
Difference between “individual” and “collective” services
Collective services are provided simultaneously to all members of society, such as households. Examples: police, defense. These are called “public” goods. An increase in the members of society benefitting from the services does not directly affect the amount of service provided.
Services provided to identifiable single households are described as individual services. An increase in the individuals benefitting from the service will affect the amount of services provided. The current ESA recognises education and health services as individual

25. Non-market services (3)
For individual services it is possible to identify quantity units for the products provided, and to derive volume measure through aggregates produced by using cost weights to combine quantity output measures.

26. Education
Definition: education output is the amount of teaching received by the students for each type of education.
The quantity of teaching received by students can be measured by the number of hours they spent at being taught (the number of 'student-hours' or 'pupil-hours').
Where this measure is not available, the simple number of students or pupils is an alternative
For some levels of education (for example tertiary education and distance-learning) the number of students may in fact be a better indicator of the education service delivered

27. Health
Health output is the quantity of health care received by patients, for each type of health care
The quantities can be weighted together using data on the costs or prices of the health care provided.
The quantity of health care received by patients should be measured in terms of complete treatments.

28. Collective services
For collective services it is impossible to define quantity units, and so the “input method” is used to measure real change
The value of a non-market collective service is determined by the cost involved.
Calculate the volume by the value at base period prices of intermediate consumption, compensation of employees, other net taxes on production and consumption of fixed capital

29. Exercise - Solution
Preliminary step Calculate growth in real terms for each output and year Calculate total growth as sum of weighted growths of each output and year

30. Exercise – Preliminary step – calculate total growth using base year weights to add together output growths KP
2010
2011
2012
2013
Agriculture
600
Manufacturing
3000
Services
2000
Total economy
5600
Total index

31. Calculate PYPs PYPs Step 2A 2010 2011 2012 2013 Agric 103.00 103.88
98.13
Manufact
102.00
101.96
101.92
Services
101.00
101.98
101.94

32. Deflate values by PYPs
Step 1
2010
2011
2012
2013
Agric
640.8
673.8
815.2
Manuf
3431.4
3628.8
3924.5
Services
2376.2
2549.5
2746.7
6448.4
6852.2
7486.4

33. Express as indices Step 2 -1st 2010 2011 2012 2013 Agriculture 106.8
106.8
102.1
116.5
Manufac
114.4
103.7
106.1
Services
118.8
106.2
105.6
Total economy
115.1
104.5
106.9

34. Reference to 2010
Step 2 -2nd
2010
2011
2012
2013
Agriculture
100
106.8
109.0
127.0
Manuf
114.4
118.6
125.8
Services
118.8
126.2
133.3
Total economy
115.1
120.3
128.6

35. Express in money terms of reference year
Step 3 table
2010
2011
2012
2013
Agriculture
600
640.8
654.2
761.9
Manufacturing
3000
3431.4
3557.7
3773.6
Services
2000
2376.2
2524.3
2666.7
Sum
5600
6448.4
6736.2
7202.2
Total economy
6735.6
7203.7

36. Thank you for your attention
CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION