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Changes to the Overseas Merchandise Trade Indexes - article

This article outlines the major changes to the overseas merchandise trade price and volume indexes, with comparisons at the total imports and total exports level only. More detailed information on the redevelopment, including comparisons at the sub-index level and an extensive set of tables, is available in Overseas Trade Indexes Redevelopment - Information Paper: December 2003

Introduction

The overseas merchandise trade price and volume indexes measure changes in the levels of prices and volumes of imports and exports of merchandise trade to and from New Zealand. Statistics New Zealand has undertaken a review of the overseas merchandise trade indexes. As a result of the review, a number of changes have been made to the way the indexes are compiled.

The main outcomes of the review are:

  • The Fisher Ideal index formula has been retained.
  • The price reference period and linking period are now the June quarter of each year (previously they were the June year).
  • An annual weight reference period has been adopted for the Paasche component of the index (this was previously quarterly).
  • Expenditure weights are being assigned at a lower level (the 10-digit Harmonised System (HS) item by country level; previously these were assigned at the 10-digit HS item level).
  • Imports valued on a New Zealand dollar value for duty (vfd) basis are now being used (previously the indexes used cost, insurance and freight (cif)).
  • Unit values derived from administrative dollar value and quantity data collected by the New Zealand Customs Service have been selectively supplemented with prices collected directly from importers and exporters and by international price indexes.
  • For existing index categories, the originally published and redeveloped indexes have been linked at the June 2002 quarter, to provide continuous long-term time series.
  • All index time series have been re-expressed on a base of the June 2002 quarter (=1000).

The September 2003 quarter indexes, calculated using the new methodology, were released in December 2003. The June 2003 provisional quarter was the last quarter calculated using the old methodology.

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Index formula

An annual chain-linked Fisher Ideal index formula used for the overseas trade indexes has remained largely unchanged since the early 1970s. Early in the review, consideration was given to moving to a chain-linked Laspeyres formula. This would have been in line with other price indexes produced by Statistics New Zealand and would have provided benefits in terms of computer system integration and consistency in terms of the use of the suite of price indexes as deflators. It was shown, however, that the Fisher Ideal overseas trade indexes tracked lower than indexes calculated using a Laspeyres methodology, and that the difference was greater for imports than for exports. This was an important consideration in relation to the use of indexes as both deflators in the national accounts and in the terms of trade calculations.

The first step in the calculation of a Fisher Ideal index is the calculation of two indexes. One, the Laspeyres, is base-weighted and uses expenditures from an earlier period to weight price or volume movements. The other, the Paasche, is current-weighted and uses expenditures from a current period to weight price or volume movements. Once calculated, the Laspeyres and Paasche indexes are averaged by calculating the geometric mean (that is, the square root) of the two indexes to give the Fisher Ideal index. In the majority of situations covered by index numbers, price and quantity changes are negatively correlated. In such cases, Laspeyres indexes tend systematically to record greater increases than Paasche indexes, with the gap between them tending to widen over time.

Although the Fisher Ideal formula has been retained under the new methodology, changes have been made to the price reference period, the linking period and the weight reference period of the Paasche component of the index, following consideration of a wide range of options.

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Price reference and linking periods

Under the old methodology, the Laspeyres and Paasche price indexes were calculated by comparing unit values for the current quarter with unit values for the previous June year. Resulting Fisher Ideal indexes were linked to indexes for the previous June year, to give a continuous quarterly time series.

A decision was made to move to a June quarter price reference period, and to link to the index for the June quarter of each year. The choice of a quarterly price reference period is in line with that used in the consumers price index, the producers price index and the labour cost index.

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Weight reference period

The old Laspeyres index had a previous June year expenditure weight reference period and the Paasche index had a current quarter weight reference period. In order to make the most direct comparisons possible, we considered options where the Laspeyres and Paasche weight reference periods were of equal length. Options involving weight reference periods of one year and of one quarter were considered, as was the possibility of chain linking quarterly. It was decided to adopt annual weight reference periods for both the Laspeyres (previous June year) and Paasche (year to each quarter) components of the index.

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Level at which expenditure weights are assigned

Under the old methodology, unit values at the 10-digit item level of the Harmonised System (HS) classification were calculated from administrative overseas trade dollar value and quantity data aggregated to the quarterly, all countries level. Expenditure weights were assigned at this level for use in Laspeyres and Paasche index calculations at higher levels. Unit values at the HS 10-digit item level were affected, for example, by relative quantity shifts between countries with different relative price levels (though editing staff could control for this if there was evidence that the relative price-level differences related mainly to quality rather than mainly to price).

For the new indexes, expenditure weights have been assigned at the HS 10-digit item by individual country level. Laspeyres, Paasche and Fisher formulae are used to aggregate to the country grouping level (for the European Union and the ‘Rest of World’) and then to the HS 10-digit item level for all countries from the two country groupings and the remaining individual countries (Australia, Japan, China and the United States). The decision to assign expenditure weights at a lower level is closely linked to decision to supplement unit values with directly surveyed prices and international price indexes (see Price indicators, below).

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Imports valuation

The New Zealand dollar valuation for merchandise imports used in the old series was cost, insurance and freight (cif), which represents the value of goods plus the insurance and freight costs associated with bringing the goods to New Zealand ports of entry. The new import indexes use New Zealand dollar value for duty (vfd), which represents the value of goods excluding the cost of freight and insurance.

The vfd valuation for imports is recommended in the System of National Accounts 1993 (SNA93) and is used in the New Zealand national accounts. Adoption of the vfd valuation for the overseas merchandise trade indexes brings them in line with the value series they are being used to deflate in the national accounts. It also reduces the overlap between the overseas merchandise and overseas services trade indexes, as insurance and freight are included in the services indexes.

Merchandise export indexes continue to be calculated using New Zealand dollar free on board (fob) values. Export fob values represent actual or estimated transaction prices of goods, including costs incurred in delivering goods on board ships and aircraft at New Zealand ports of export.

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Linked time series and new expression base

For existing index categories, the originally published and new indexes have been linked at the June 2002 quarter to provide continuous long-term time series. These time series have been expressed on a new expression base of the June 2002 quarter (=1000). This means that movements up to and including the June 2002 quarter for the originally published and new series are identical. It also means that, for imports, the basis of valuation used in the linked, long-term series on the new expression base was cif up to the June 2002 quarter, and vfd for the September 2002 and subsequent quarters. The cif and vfd-based price and volume series were linked so that the valuation change did not in itself cause any shift in prices or volumes.

Movements in export or import dollar values can be decomposed into component price index and volume index movements (that is, a price index movement between two periods multiplied by a volume index movement between the same two periods equals the dollar value movement). The appropriate decomposition valuation is cif up to and including the June 2002 quarter, and vfd from the September 2002 quarter onwards.

The originally published series on a base of the year ended June 1989 (=1000) have been discontinued, and stop at the June 2003 provisional quarter.

New exports breakdown this year
An additional exports breakdown of mutually exclusive, all-inclusive commodity groupings will be added to the quarterly Hot Off The Press during 2004.

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Price indicators

Under the old methodology, only unit values were used as indicators of price change. Unit values are derived from administrative overseas trade dollar value and quantity data collected by the New Zealand Customs Service. They are then extensively edited with outliers being removed before being used in trade index calculations.

One of the key features of the redevelopment is that unit values, which are not particularly reliable for some areas of merchandise trade, have been selectively supplemented with prices collected directly from importers and exporters, and by international price indexes. This change, which mainly affects the import indexes, improves the quality of the indexes.

Directly surveyed prices
Prices are being collected directly from importers and exporters for selected goods that are regularly imported or exported in the same form to the same or similar specification. These items may not have a specified unit of quantity or may fall under an HS code with a heterogeneous description. Directly surveyed prices are collected from importers and exporters via the existing commodity price survey used for the producers price index.

Directly surveyed prices were first collected in the June 2002 quarter, so they contribute to movements for the September 2002 and subsequent quarters.

The process of adding to the pool of directly surveyed prices will be an ongoing one and will become part of the ongoing overseas merchandise trade index quality assurance programme.

International price indexes
International price indexes are being used selectively as a proxy to measure price change faced by importers for goods that are irregularly imported (for example public transport equipment), imported to one-off specifications (for example, telephonic and telegraphic apparatus) and technically complex goods subject to rapid quality change (for example computer equipment).

The main international price index used was the US producer price index, with some use of the US HS export price index. In both cases, monthly international price index numbers have been converted to quarterly index numbers and then exchange-rate adjusted using the New Zealand Customs Service rates of exchange.

Adjustment to unit values for imported cars
The calculation of price movements for the main HS 10-digit item codes for cars differs from the unit value calculation used for other items in the overseas trade indexes. The used-car codes have previous June quarter and current quarter unit values calculated for each year of manufacture. The new car codes have unit values calculated for each of the main makes of car recorded under the codes. Movements in these unit values are weighted, by the value of cars imported for each year of manufacture and make of car, to give Paasche, Laspeyres and Fisher indexes at the HS 10-digit item by country level.

The method was introduced in the June 2002 quarter of the originally published series, to reduce the effect on the age distribution of used car imports of new frontal impact standards, which reduced the number of pre-1996 used cars being imported. The method has been reworked back to the June 2002 quarter for the new series, using the new methodology’s quarterly price reference period and annual Paasche weight reference period.

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Comparison of originally published and new time series

As there was very little difference between the old and new series prior to the June 2002 quarter, a decision was made to link the new series to the originally published series at that point. The main benefit of the review came from supplementing unit values, from the June 2002 quarter onwards, with directly surveyed prices and international price indexes, particularly for imports.

Total imports
Figure 1 shows that, over the past four quarters, the new total merchandise imports price index has fallen more quickly than the originally published series. The new series recorded greater decreases in three of the four quarters, and fell by a total of 12.0 percent from the June 2002 quarter to the June 2003 quarter. This compares with a fall of 9.4 percent for the old series from the June 2002 quarter to the June 2003 provisional quarter. Over the same period, the trade weighted index strengthened by 11.9 percent, having a strong downward influence on import prices.

Total Merchandise Imports Price Index Figure 1.

About two-thirds of the difference between the old and new movements for total imports from the June 2002 quarter to the June 2003 quarter has been caused by the introduction of international price indexes for computer equipment and for computer and office equipment parts and accessories.

Total exports
Figure 2 shows that there was little difference in the overall movements, over the past year, of the originally published and new total merchandise exports price index series. The new series recorded a fall of 11.4 percent from the June 2002 quarter to the June 2003 quarter, compared with a decrease of 11.1 percent for the originally published series from the June 2002 quarter to the June 2003 provisional quarter. The new series showed a greater fall in the September 2002 quarter, but a smaller fall in the December 2002 quarter. As noted above, the trade weighted index strengthened by 11.9 percent from the June 2002 quarter to the June 2003 quarter, having a strong downward influence on export prices.

Total Merchandise Imports Price Index Figure 2.

Terms of trade
The merchandise terms of trade index measures the changing volume of merchandise imports that can be funded by a fixed volume of merchandise exports. It is calculated as the ratio of the export price index to the import price index. Figure 3 shows that the new terms of trade series rose more quickly than the originally published series over the last two quarters shown. This is caused by the new import price index series falling by more than the originally published series, while movements in the old and new export price index series were quite similar. The new terms of trade series was 0.7 percent higher in the June 2003 quarter than in the June 2002 quarter, while the old series was 2.0 percent lower.

Total merchandise Imports Price Index Figure 3.

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