Chapter 15.
International Price Indexes

Concepts
A central question in international economics is "how will trade affect the production of goods and services in the economy?"¹ This question leads immediately to the requirement that real or "inflation-adjusted" trade be measured. However, due to the variety and complexity of the goods and services involved in trading, it is not possible to measure the quantity of those goods and services in physical units. Instead, the quantities are approximated via deflation by dividing the aggregate export sales and import purchases by the export and import price indexes, respectively.

Subsequently, one can obtain a measure of real net exports (RNE) by subtracting the value of imports from the value of exports, after deflation to constant dollars. The current value of import flows (Rm,t) is deflated by the current import price index (Pm,t), and the current value of export flows (Rx,t) is deflated by the current export price index (Px,t)

IPP import and export price indexes are produced primarily to deflate the various foreign trade statistics produced by the Bureau of the Census and the Bureau of Economic Analysis (BEA). As a result, IPP uses the Bureau of the Census concept of imports and exports which, with some minor adjustments, can also be used to deflate the foreign trade sector using Balance of Payments (BOP) or National Income and Product Accounts (NIPA) definitions. Export statistics measure the value of the total physical movement of products out of the United States. They include products exported from the U.S. customs territory, U.S. customs bonded warehouses, or U.S. foreign trade zones. Import statistics measure the value of products of foreign origin, goods of domestic origin returning to the United States unchanged, and goods assembled overseas with components originating in the United States. A good is considered a general import when it passes into a U.S. customs territory, a U.S. customs warehouse, or a U.S. foreign trade zone.

In addition to the price indexes for goods, IPP also constructs selected services indexes. These indexes include import and export services indexes, as well as international services indexes. Import and export services indexes conform to BOP definitions and measure the price trends for payments and receipts between the U.S. (including its territories such as the Virgin Islands and Puerto Rico) and foreign residents for international services transactions. A U.S. resident includes corporations, businesses, and individuals, but does not require either specific U.S. ownership or citizenship. International services indexes measure price trends for international services transactions regardless of the residency of the service providers and purchasers.

Footnotes
¹Note that even if there is no change in aggregate production, trade can affect the mix of goods and services produced.

Next: Data Sources