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Chaining? User needs and good practice!

Learn why chaining is important in index reference periods and how it helps reflect current consumption patterns and consumer behavior. Explore the features and benefits of using chain indices, as well as the complexities involved in updating weights and introducing new elements.

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Chaining? User needs and good practice!

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  1. Chaining? User needs and good practice! Why? Definitions Introduction of new weights New consumption patterns Features

  2. Why chaining? t+2 t t+1

  3. Input • Elementary price indices • Weights • remain fixed for a sequence of at least 12 months • Change yearly?

  4. Definitions Weight reference period = 0, t or b Price reference period = 0 Index reference period (year = 100) La=Laspeyres Pa=Paasche Lo=Lowe Yo=Young

  5. Definitions • Weight reference period • Usually - a year (ex 2008) • Price reference period • Usually – a month (ex Dec 2010) • Index reference period • Usually – a year (ex 2005) Do not use ”base period”

  6. Same weights, new products If Jevons or Dutot – then;

  7. New weights • Changes in relative quantities and relative prices implies new expenditure weights. Price-updating not good enough. • Need to reflect current expenditure pattern and consumer behaviour • When new weights are introduced, the price reference period for the new index can be the last period of the old index, the old and the new indices being linked together at this point. The old and the new indices make a chain index.

  8. New weights – complex operation • Provides the opportunity to introduce • new items • new samples • new data sources • new compilation practices • new elementary aggregates • new higher-level indices • new classifications

  9. Consumption patterns change over time • Consumers will tend to substitute away from products of which the prices have increased relatively • New products are continually being introduced on the market while others drop out • Longer term • Rising income • Standard of living • Demographic changes in the structure of the population • Changes in technology • Changes in preferences

  10. Updating; Sensible and necessary practice • At least every five years, and more often if there is evidence of rapid changes in consumption patterns – but not straightforward • It can be costly!

  11. Important features of a chain index • The chain index formula allows weights to be updated • Facilitates the introduction of new items and sub-indices and the removal of obsolete ones • Chaining is intended to ensure that the individual indices on all levels show the correct development through time • Chaining leads to non-additivity

  12. Questions or comments?

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