Chapter 15.
International Price Indexes
Uses
and Limitations
As mentioned above, the primary reason for producing
import and export price indexes is to deflate (or adjust
for inflation) the value of U.S. foreign trade. Deflating
trade flows is a means of breaking down the change in the
value of import and export trade into changes in prices
versus changes in quantity. The import and export price
indexes are used to deflate the monthly trade figures
produced by the Bureau of the Census as well as the
quarterly National Income and Product Accounts. These
adjustments are crucial to estimating the real output of
the U.S. economy as well as real consumption and real
investment. Import and export price indexes have a number
of additional uses, including measuring domestic
inflation, studying long-term price trends, as inputs to
forecasting future prices, as inputs into trade contracts
and trade legislation, and in replacement cost
accounting.
Foreign sector price statistics are also valuable when
doing various elasticity studies. Price and income
elasticities can be calculated in conjunction with one
another in order to distinguish how much of trade volume
changes are attributable to price effects and how much to
income effects. Price elasticities measure how the
quantity traded responds to price changes as measured by
the import and export price indexes. Income elasticities
measure how trade responds to changes in the real value
of national income.
Another use of import and export price indexes is as
an input to measuring U.S. industrial competitiveness.
Different forms of economic competitiveness can be
measured by calculating terms of trade indexes, deriving
export price comparison ratios, or calculating import and
export foreign currency indexes. Individual traders can
look at the relevant import or export price index in
their industry to compare how their price changes compare
to average price changes.
One final use for import and export price indexes is
to analyze the effect of exchange rates on prices.
Pass-through rates can be calculated using the price
indexes to measure how much of an exchange rate change is
passed-through to either an import price or an export
price.
Producing indexes used primarily as deflators,
however, affects the interpretation of the indexes when
used for other purposes. For example, import price
movements can often be an indicator of future domestic
inflation because many final goods and inputs to domestic
production are imported. Because import price indexes
only measure the value of a product at a port (either
domestic or foreign), special care must be taken when
using these data to assess the effect of import prices on
domestic inflation levels. First, the f.o.b. (free on
board) foreign port series excludes international freight
charges. Second, both an f.o.b. foreign port and a c.i.f.
(cost, insurance, freight) U.S. port price series exclude
duty as well as costs associated with domestic
intermediaries (e.g., wholesalers and retailers). All of
these factors may affect the final selling price. For
purposes of deflating imports, however, duties are
excluded from prices before the indexes are calculated.
This exclusion, therefore, affects any use of the indexes
to measure price changes that focuses on the entire
transaction price, which would include any taxes levied.
Import and export price indexes are not seasonally
adjusted. Consequently, price trends for commodities with
seasonal patterns may require longer time spans for
proper analysis.
Another issue concerns the appropriate exchange rate
to use in converting from a foreign currency price to a
dollar price, when items are priced in foreign currencies
(approximately 15 to 20 percent of non-oil imports
currently are priced in foreign currencies). The
International Price Program uses an exchange rate factor
which represents an average for the month immediately
preceding the pricing month. How closely this figure
approximates the exchange rate actually used in the
valuation of the item depends upon the volatility of
exchange rate movements. IPP will continue to assess
these as well as other issues as they arise concerning
the construction of import and export price indexes to
ensure that measurement objectives are met.
Next: Technical
References
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