In This Chapter

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