1. Price and Volume Measures
THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

2. Money and prices Flows and stocks are expressed in monetary units
Different types of stocks and flows:
Transactions in products (P)
Distributive transactions (D)
Financial transactions (F)
The monetary unit is the common denominator
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
Subsequent account entries are valued at purchasers’ prices

4. Basic prices and purchasers prices
The basic price is the price of a unit less taxes on the product plus subsidies on the product ( D.21 less D.31)
It excludes any transport charges invoiced separately by the producer.
It includes D.29 less D.39 : Other taxes less subsidies on production. (e.g. local business property tax)
The purchaser’s price is the price the purchaser pays for the product. It includes taxes less subsidies on the products and transport charges paid separately by the purchaser.

5. Valuation of transactions in products
Output is to be recorded and valued when it is generated by the production process
Output of finished goods transferred into the producer’s inventories is valued at the current selling price
So output of goods is not valued at the selling price but at prices which are current at the time they are produced
For services, output and sale occur at the same time so there is no only one price

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

7. 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 are actually sold at the time it is produced, this is only possible for homogeneous goods

8. Quality
In national accounts the concept of quality does not refer to a hierarchy of products, it refers to the characteristics of a product
We cannot say that a product is better than another, we only say that products are of same quality or of different quality depending on whether they correspond to the same homogeneous product
Differences in quality are reflected in the following factors:
Physical characteristics;
Deliveries in different locations;
Deliveries at different times;
Differences in conditions, circumstances, environment of sale

9. 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 ti be broken down into price change and “real” change ie volume change
Volume change is a measure of the change in aggregate product quantities

10. Volume and constant prices
For a given homogeneous product the equation v =p x q allows the change of value over time to broken down into change of price and change of quantity
At an aggregated level, this equation is no longer useful since it is not possible to aggregate quantities of different products
There is however a simple way of breaking down the change in value of a set of products between two periods
The effect of change in price can be offset by calculating what the value of the set of products would have been if there had been no changes in prices

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 by analogy with 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. Chaining: example

17. 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

18. 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

19. New products (1)
The method of calculating price and volume indices assumes that the products exist in both successive years
However, many products appear and disappear from one year to the next
There is no difficulty in the case of products which existed in the previous year but which no longer exist in the current year
The problem appears in the case of new products, since for the previous year it is not possible to measure the price of a product which does not exist

20. 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
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. 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

22. 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

23. 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

24. 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.

25. 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

26. 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.

27. 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

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