Price Concepts

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Price Concepts ICP Regional Course on Pric
e Statistics and ICP Male, Maldives 25-29 Septe
mber 2005 TIMOTHY LOStatistician, Internation
al Comparison ProgramAsian Development Bank
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Price Concepts

• PPPs are used to convert national expenditure
  data into a common currency
  
• The expenditure data are taken from the National
  Accounts
  
• To ensure consistency with expenditure data, the
  ICP adopts the price concepts as defined in the
  1993 System of National Accounts (SNA 93).

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Valuation of Household Consumption Expenditures

• Expenditures are valued at the actual transaction
  prices paid by purchasers.
  
• The purchasers are resident households in their
  capacity as consumers.
  
• The purchasers price is the amount actually paid
  by the purchaser to take delivery of the goods or
  services at the time and location required by the
  purchaser.

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Purchasers Price

• The purchasers price includes any delivery
  charges e.g., for goods bought from mail order
  houses.
  
• It includes any taxes payable on the products
  purchased any invoiced VAT to the purchaser that
  is not subsequently deductible.

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Offer Prices

• Prices are collected from sellers, retail
  outlets, and not from households, the
  purchasers.
  
• The prices displayed in outlets are typically the
  prices at which the products are offered for
  sale not necessarily the prices at which the
  products are actually sold.
• The prices advertised in magazines are also offer
  prices.

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Offer Prices Transaction Prices

• The transaction prices paid by purchasers may
  differ from offer prices for various reasons
  
• Lower prices may be payable for bulk purchases.
• Sellers may hold periodic sales in which prices
  are temporarily reduced.
  
• Prices may be lowered to sell off perishable
  goods.
  
• Lower prices may be paid for cash purchases.

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Bargaining Negotiated Prices

• Offer prices may be reduced by bargaining.
• In some markets, including informal markets,
  there may be no offer prices displayed, the
  prices being determined entirely by bargaining.
  
• In such cases, the price collector should try to
  collect the price from the purchaser rather than
  the seller.
  
• The price collector may actually have to purchase
  by bargaining to obtain a price.

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Purchasing on Credit

• The seller may provide credit or arrange for a
  financial institution to provide credit - hire
  purchase, etc.
  
• The purchasers price excludes all interest
  payments payable over the period of any loan
  extended to the purchaser.
  
• Borrowing is a financial transaction that is
  quite separate from the purchase of a good or
  service loan repayments are not purchases.

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Service Charges

• The purchasers price includes any service charge
  payable on a meal, hotel room, taxi ride, etc.
  
• It also includes the tip when a tip is normally
  expected, even if the exact amount is
  discretionary.
  
• A simple gift that is not connected with the
  acquisition of a good or service is not part of a
  purchase.

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Consumption of Own Production

• Imputed expenditures on goods and services
  produced for own consumption are valued at
  equivalent market prices.
  
• For owner occupied housing, the housing services
  produced for own consumption are valued at
  equivalent market rents, if there are any. If
  not, the rents should be estimated by user
  costs mostly, depreciation plus capital, or
  interest, costs.

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Average Annual National Prices

• The expenditures in the annual national accounts
  are the total annual values for the country as a
  whole.
  
• The price of the same product can vary during the
  year in different regions of the country.
  
• The required ICP price for a single product is
  the average annual national price.

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Average National prices

• The required average as just defined is a
  weighted average of the various prices at which
  the product may be on sale at different times or
  in different locations.
• The weights are the quantities sold at each
  price.
  
• Information on quantities will not usually be
  available, approximations will have to be used.

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Average Prices

• Prices should only be averaged when the
  quantities to which they refer are homogeneous.
  
  
• If there are different qualities, the average
  price is dependant on the mix of qualities and
  products of differing quality must then be
  treated as two different products.
• If the products are tightly specified, there is
  little room for variation in quality.

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Quality Differences

• If different qualities sell at different prices
  at the same time in the same market, they are
  effectively different products.
  
• Their relative prices reflect both relative costs
  of production their relative utilities to
  consumers.
  
• If the products in different countries are of
  different qualities, their prices are not
  comparable.

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Characteristics and Quality

• A product has a number of characteristics that
  determines its quality.
  
• Physical characteristics may be size, weight,
  materials, durability, power, speed, frequency,
  reliability, etc.
  
• Different qualities of the same product have
  different mixes of the same kinds of
  characteristics.

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Quality and Price

• It may be possible to estimate the effect of
  different characteristics on price.
  
• In that case, it may be possible to estimate by
  how much the price of some quality differs from
  some specified quality as a result of the
  difference in its characteristics.
• In that case, the price of the observed quality
  may be adjusted to the required or specified
  quality.

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Adjusting Prices for Quality Differences

• Prices can be adjusted for differences in quality
  of a product.
  
• Adjustment can ensure comparability of prices
  collected in different countries.
  
• Adjustment is made by predicting how much a price
  will differ on the basis of differences in
  product characteristics.

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Quality Adjustments

• Hedonic Approach
• The most general approach for quality adjustments
  
  
• Follows a basic principle of adjustment which is
  on the basis of the characteristics of a product
  
• Uses a simple economic model and classic
  statistical estimation procedures that is
  objective may be easily replicated
  
• Not widely used as it is data intensive

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Hedonic Approach to Quality Adjustments

• Reasons for using product characteristics for
  quality adjustment
  
• Affects the utility derived by the consumer
• Affects the price a consumer is willing to pay
• Price is defined by a function of a set of
  characteristics of a product

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Quality Adjustments

• Hedonic Approach
• Example Market price of a light bulb
• May be defined by the characteristic of wattage
• The market price of a light bulb with several
  price observations collected in the same market
  from various outlets can be determined
  
• It specifically seeks to estimate by how much an
  increase in the wattage may be expected to change
  the market price of a bulb

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Quality Adjustments

• Hedonic Approach
• Example Market price of a light bulb
  (continued)
  
• The price data collected is modelled by a least
  squares regression of price and wattage
  
• Relationship between prices and characteristics
  does not have to be linear
  
• The relationship established between price and
  wattage can be used to predict how much a 120
  watt light bulb would cost

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Quality Adjustments

• Hedonic approach to adjusting prices applied to
  PPPs
  
• Target product specification of light bulb is
  120w
  
• Country collected price of 100w
• Methodology
• On the basis of the hedonic relationship
  established earlier, the price for 100w is to be
  adjusted accordingly to market price of 120w bulb

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Quality Adjustments

• Estimating Price Ratio
• The resulting quality adjusted price may then be
  compared with the prices of 120 watt bulbs in
  other countries to obtain a price ratio for PPP
  purposes
• For this round of ICP
• Hedonic approach is not feasible

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Quality Adjustments

• Comparability
• Is crucial for robust comparisons to be made
• Products need to be clearly specified
• A tight product specification is defined by very
  precise product description to minimize the
  variation of characteristics of the product
  
• To achieve comparability, all the characteristics
  of the products priced across the countries must
  match the target specifications

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Approach to quality adjustments

• Methods for adjusting quality differences
• Relative costs
• Size, weight, dimension or capacity
• Brands
• Conditions of sale, type of outlet and location
• Note
• Before making a quality adjustment an important
  question is, how large is the difference between
  actual characteristic and the targeted
  characteristic, as it could be subject to errors

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• Thank You!