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Activity Number: 654 - Evaluating and Reducing Nonsampling Errors in Surveys
Type: Contributed
Date/Time: Thursday, August 1, 2019 : 10:30 AM to 12:20 PM
Sponsor: Government Statistics Section
Abstract #304676 Presentation
Title: Measuring the Substitution Effect in Producer Price Index Goods Data: 2002-2016
Author(s): Jonathan Weinhagen*
Companies: BLS
Keywords: Producer price indexes; Price indexes; Substitution bias

The Bureau of Labor Statistics calculates the US Producer Price Index using a modified Laspeyres formula that employs fixed quantities as weights but allows prices to vary over time. Having fixed quantities as weights imposes a restriction on substitution in response to relative price change. This paper examines the effects of the substitution restriction by re-estimating select Final Demand-Intermediate Demand (FD-ID) PPIs from 2002 through 2016 on an annual basis using fixed-based Fisher and Tornqvist formulas, both of which allow for substitution. These experimental FD-ID indexes are calculated from annual average values of commodity indexes with weights updated annually. Subsequently, the experimental indexes are compared to the same indexes calculated using the fixed-based Laspeyres formula. The paper will demonstrate that, in general, the experimental FD-ID indexes calculated using formulas that allow for substitution result in lower index values than those calculated using the Laspeyres formula, implying substitution toward relatively less expensive products.

Authors who are presenting talks have a * after their name.

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