Technical Notes on Producer's Price Index (PPI)

Release Date: 

Tuesday, October 2, 2012

 

I. INTRODUCTION
The National Statistics Office generates the monthly Producer's Price Index (PPI) for Manufacturing simultaneously with other indicators such as the Value of Production Index (VaPI), Volume of Production Index (VoPI), capacity utilization rate, among others, to better measure the performance of the industry.
 
Studies on the generation of the Producer's Price Index (PPI) started in 1980 when the Index of Physical Volume of Production series prepared by the Central Bank of the Philippines was discontinued. This came about because of the transfer of responsibility of operations and processing of the Monthly Survey of Establishments (MSE) for manufacturing from the Central Bank to the now National Statistics Office (NSO).
 
Work on the original PPI started with 1978 as the base year which was later revised to 1985. Since it was felt that the components of the PPI were no longer reflective of the prevailing production structure of the manufacturing sector, the PPI operations were halted.
 
The compilation of the PPI with 1992 as the base year was revived in a project "Improvement of the Producer's Price Index of Selected Manufactured Products" through the Grants-in-aid Program of the National Statistical Coordination Board (NSCB). From 1992 to 1993, the NSO with guidance from the Technical Committee on Price Statistics of NSCB worked for further improvements to the PPI to make it more reflective of the actual situation of the industry. Later in 2001, the office released the rebased series of PPI with 1994 as the new base year.
 
II. USES OF PRODUCER'S PRICE INDEX
The Producer's Price Index (PPI) for Manufacturing is a composite figure of producer's prices of representative commodities included in the market basket.
 
The PPI serves various purposes, the most important of which are the following:
 
a. measures monthly or yearly changes in the producer's price of key commodities in the manufacturing sector, 
b. serves as a deflator to Value of Production Index (VaPI) in the estimation of the Volume of Production Index (VoPI), and 
c. serves as deflator in the estimation of manufacturing production in real terms (at constant prices) in the system of national accounts.
 
III. WEIGHTS USED
The weights used for the computation of the 2003 PPI (latest) were based on production concentration ratio from the 1998 Annual Survey of Establishments (ASE) for manufacturing.
 
Since the PPI is of the Paasche-type, the weights are continuously revised upon availability of the latest data from the ASE or CE. The revision of the weights are, however, instituted only at the beginning of each year (starting January) and shall be used for the entire year.
 
IV. MARKET BASKET AND SAMPLE ESTABLISHMENTS
For the 2003 series, the PPI market basket consists of 551 manufactured goods which are produced by 271 manufacturing establishments in the country. Classification of these commodities is by industry group (4-digit PSIC).
 
1. Criteria for Selection of Commodities and Sample Establishments
 
The major criteria adopted in the initial selection of commodities (in 1992) for the market basket are as follows:
 
a. the commodity has relatively high market share
b. the commodity was available in the market in 1992, this being the base year
c. the commodity is being produced currently, and 
d. the market share of the commodity has been stable for the last three (3) years based on the ASE reports.
 
In the same manner, criteria were also set for the selection of establishments, as follows:
 
a. establishment has an ATE of 50 and over
b. establishment has relatively high concentration ratio
c. establishment is good respondent in past and current surveys of NSO; that is, it submits prompt reports and provides quality data, and
d. d. preferably, the establishment is a sample of the Monthly Integrated Survey of Selected Industries (MISSI).
 
V. UPDATING OF SAMPLE COMMODITIES
The number of sample commodities covered in the PPI are updated at the start of each survey year in order to make the commodities more representative of the industry. This is done by including new commodities not previously included and deleting those whose manufacturers have ceased operation or were on strike during the previous year. Also deleted from the list are those whose manufacturers are considered as delinquent respondents during the previous survey year.
 
VI. BASE YEAR
The latest series has 1994 as the new base year for which the average monthly producer's prices of commodities are based. Earliest available series using this new base year is for 1998.
 
The earlier series had 1992 as the base year and was continued until December 2001. This was permanently discontinued in 2002.
 
VII. QUESTIONNAIRE FORM AND CONTENT
A shuttle type questionnaire is used to collect data on producer's prices of commodities. This approach reduces cost and enhances consistency and accuracy in reporting since the respondent establishment is provided with a running account of all monthly responses for the year.
 
The following items of data, appearing in the questionnaire shown in Attachment 1, are gathered from the respondent establishment:
 
Name of product/s
Brand name
Product specification
Unit of measure
Producer's price/s of selected product/s.
 
VIII. SOURCE OF DATA
A Producer's Price Survey is conducted monthly by the NSO to collect monthly producer's prices of sample commodities. For the year 2003, the survey covers 551 sample commodities produced by 271 manufacturing establishments nationwide. Refer to Attachment 2 for distribution of number of sample commodities and sample establishments by 4-digit PSIC.
 
IX. DATA COLLECTION
Distribution of the questionnaires to sample respondents is done only once at the start of each year by NSO field personnel. Between the 10th to the 30th day of each month after the reference month, a field staff of NSO visits the establishment and copies the data from the establishment's file to his own copy.
 
Data supplied by the establishment are then furnished the NSO Central Office (Industry Statistics Division). The subject matter specialists then copy the data to their own copy of the questionnaire. Altogether, three copies of the questionnaire for each establishment are prepared: one for the establishment, another for the NSO field staff and the other for subject matter specialists.
 
X. DATA PROCESSING
Editing and validation of data of producer's prices of commodities are done manually. Computation of the price relatives and indices at the industry and major industry group (4-digit and 3-digit 1994 PSIC) are done using EXCEL through the use of microcomputer.
 
For timeliness of dissemination, preliminary indices are generated on a pre-determined cut-off date, usually (eight) 8 weeks after the reference month. Data of non-responding establishments are estimated or imputed based on past responses. The indices are revised upon receipt of late reports of establishments. The office has set a policy to allow only two revisions are the release of the preliminary figures, and in many instances, the final data corresponds to a collection rate of over 95 percent.
 
VIII. METHODOLOGY
The procedures used in the computation of the Producer's Price Index are as follows:
 
1. The industry group level (4-digit PSIC)
 
The PPI at the 4-digit PSIC is simply the unweighted arithmetic mean of the price relatives of the commodities representing the industry and multiplied by 100.
 
PRij =    N
Sum ( p 1h / p 0h )
  n = 1
 
---------------------- x 100
             N

 
 

where

PR ij = current month PPI at the ith industry group (4-digit) of the jth major industry group (3-digit)
p 1h   = current month producer's price of commodity h
p 0h   = average monthly producer's price at base year of commodity h
N       = total number of representative commodities at ith industry group
n       = 1,2,3,...,N

 

The formula for PPI ij can be modified such as that the average monthly price relative of the commodities in the industry is multiplied by the previous month PPI at the 4-digit PSIC to obtain the current month PPI. That is,

   N
Sum (p hm / p hm-1)
  n = 1
-----------------------------

             N

  PPI ijm = PPI ijm-1 *  
 

where

PPI ijm   = current month PPI 
PPI ijm-1 = previous month PPI 
   N
Sum (p hm / p hm-1)
  n = 1
-----------------------------

              N
= average price relatives of commodities

p hm    = current month producer's price of commodity h 
p hm-1 = previous month producer's price of commodity h 

The latter formula is especially useful when new commodities enter into market basket as replacements/additions. The base year prices of these commodities need not be obtained as the alternative then is to make available the previous month producer prices of the new commodities to permit the computation of the price relative, p hm/p hm-1
 
2. The industry group and division levels (3-digit and 1-digit PSIC)
 
The Producer's Price Index for manufacturing at the 3 and 1 digit PSIC is obtained as the weighted harmonic mean of the component price indices.
 
j = 1 /    p
Sum (w ij * 1/PPI ij)
 i = 1

 
 

where

j       = PPI at the jth major industry group (3-digit)
w ij    = weight of the ith industry group
PPI ij = PPI of the ith industry of the jth major industry group 
i          = 1,2,3,...,p = number of industry groups at the jth major industry group
k = 1 /    q
Sum (w j * ( 1 / I i ))
  j = 1

 
 

where

Ik    = PPI for manufacturing (1-digit) 
w j = weight of the jth major industry 
I j    = PPI at the jth major industry 
j      = 1,2,3,...,q = number of major industry groups 

 
 
 
3. Computation of growth rates
 
 
Growth rates are computed to show the changes in the index over two points in time, that is, month-on-month and year-on-year.
 
r m = I m - I m-1)
--------------- x 100
      I m-1

 
 

where

r m   = month-on-month growth rate 
I m    = current month index 
I m-1 = previous month index
r t = I t - I t-12)
-------------- x 100
      I t-12

 
 

where

r t    = year-on-year growth rate 
I t     = current month index 
I t-12 = index for same month of previous year

 
 
4. Computation of contribution to overall growth rates
 
 
Contributions to overall growth rates are computed to show the relative share of increases/decreases of the major sectors to the total manufacturing sector.
 

C m =

     (r m * w i)
-----------------------
     n
 Sum
 (r m * w i)
     i

 
 

where

C m = contribution to overall month-on-month growth rate 
r m  = month-on-month growth rate 
w i  = weight for each major sector 
i      = major sectors with month-on-month increases/decreases

C t =

      ( r t * w i)
--------------------
      n
  Sum
 (r t * w i)
      i

 
 

where

C t  = contribution to overall year-on-year growth rate 
r t   = year-on-year growth rate 
w i = weight for each major sector 
i      = major sectors with year-on-year increases/decreases

 
 
 
XII. DISSEMINATION
PPI data are considered preliminary when first released in the NSO website www.census.gov.ph about 8 weeks after the survey reference month. Technical notes relating to the PPI are also published in the website. Data are released simultaneously to government agencies and leading newspapers by faxing copies of the report "Monthly Integrated Survey of Selected Industries (MISSI)" and the accompanying press release.
 
The report contains highlights not only the PPI but also of other indicators derived from the MISSI such as Value of Production Index (VaPI), Volume of Production Index (VoPI), capacity utilization rate, among others. Revisions to the data are included in the next month's report.
 
XIII. LIMITATION OF DATA
The users of data are advised to be particularly cautious in interpreting and analyzing the PPI results. A careful understanding of the methodology and concepts used is necessary to avoid undue misinterpretation of the data.
 
XII. DEFINITION OF TERMS
Base year is the year chosen as reference on which the movement in prices of the current year to movement in the previous years are compared and at which the index is taken is equal to 100.
 
Commodities are goods normally intended for sale in the market at a price that is designed to cover the cost of production.
 
Market basket for the PPI refers to sample commodities produced by the manufacturing establishments.
 
Paasche Index is an index number using weights, usually of the current period.
 
Price relative is the ratio of current price to the base year.
 
Producer's price is the unit price (ex-plant) of the commodity as it leaves the establishment of the producer. It includes any indirect tax or subsidy levied/received on the commodity before it leaves the establishment.
 
Value of products sold refers to value of products sold (sales and inter-plant transfers), whether paid in cash or receivables by the establishments.

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