Index of Industrial Production: Methods of Compilation UNIDO- Statistics Unit

IIP in UNIDO statistical products UNIDO maintains international industrial statistical databases: INDSTAT, IDSB, World MVA database and MINSTAT Statistical products: International Yearbook of Industrial Statistics; Databases – INDSTAT2, INDSTAT4, IDSB, Statistical country brief (SCB), CIP, MVA -online data portal available in: www.stat.unido.org Yearbook , INDSTAT2 and SCB presents Index numbers or/and data derived from the index numbers Index numbers are collected from UNSD and OECD (for OECD countries) and supplemented with other sources or own estimates

Use of IIP in estimation of recent year MVA Significant time-lag between reference year and data dissemination year – around 3 years User’s demand for more recent year estimates

Base weights and IIP Base weights – MVA for base year at current prices Preferable valuation method - basic prices IIP – fixed base annual indices VA estimates

Aggregated quarterly indices for the world MVA Main objective: to monitor the world industrial growth trend The data covers 65 sample countries which accounts for 94% of the world MVA Weights are computed at the country level Index numbers are obtained from the NSOs, UNSD and EUROSTAT

World manufacturing growth trends by country groups

Index of industrial production- total manufacturing, MHT, and Low-tech, EU27, 2005-2015, seasonally adjusted (2010=100)

Importance of index numbers Index numbers show the real growth rate free of price fluctuation It can measure the changes with a minimum range of data collected from a frequent inquiry IIP produces fairly comparable measures for cross-country data analysis IIP provides the basic data for estimation of quarterly and annual national accounts IIP is a reliable measure of the current supply condition in the market

Approximation of industrial production and related variables Output measures Output is defined as the set of goods and services (products) produced by an establishment. Output can be measured in monetary terms (values) or in physical quantities. A representative monthly/ quarterly survey is required. (a) Value of output Includes all products produced and should be recorded at the time it is produced. The volume measure is obtained through the use of an appropriate price deflator is indispensable to ensure that quality changes of the products are reflected in the production volume.

(b) Physical quantity of output Physical quantity of output measures product output in terms of the number of items, tons, liters, etc. Used when the products are homogeneous and quality remains constant over time. No deflation process is required. (c) Value of output sold Synonymous with such terms as turnover, sales or shipments Disadvantages • Value of output sold measures production sold rather than measuring the output of the production process in the reference period. • Work-in-progress is excluded • Value of output sold normally corresponds to the industry class (ISIC class) Advantages • Data are generally available in a more timely fashion • Data collection is less costly due to the higher level of aggregation compared to product data. To calculate volume data also an appropriate price deflator is needed

Input measures (labor input, materials consumed) When reliable or accurate measures of output cannot be obtained. Labor input number of hours worked, full-time equivalent jobs, or numbers of persons engaged. Used in a volume extrapolation method. Number of hours worked is preferable. Takes into account effects like changes in standard weekly working hours, the proportions of part-time employees, and hours of overtime. Caution is advised because of an increase in labor skills or the use of more or better capital equipment, the employment-based indicator will tend to underestimate the increase in value added. Changes in the relationship between labor input and value added can be attempted by applying productivity factors.

(b) Material consumed Is only useful when there is a clear relationship between material use and production. Energy use e.g. has proven to be a poor quality variable and should no longer be used.

Basic principles of index compilation Measures of output are preferred to input measures Value of output or physical quantities of output are preferred to value of output sold Deflation and volume extrapolation are not considered to be equivalent.

Laspeyres, Paasche and Fisher volume indices The Laspeyres volume index can be defined as the change in quantities (or volumes) of a specified basket of goods and services valued at the prices of the reference period 0 (backward looking). The Paasche index differs from the Laspeyres index in two respects. It uses a harmonic mean of quantity changes instead of an arithmetic average and the fixed period volumes are those of the current period t (Weighted with the current period value - forward looking) The geometric mean as an average for these two indices leads to the so called Fisher ideal volume index, which is generally considered as the best evenly weighted average of the Paasche and Laspeyres indices.

Building IIP from the lowest level The calculation starts with the measurement of indicators at the product level (CPC) Where values of production are collected, deflation is needed to obtain industrial production volumes. Deflation of the value data to produce volume measures should occur at the most detailed level of the index structure.

Weighting and aggregation Weights are the essential part of the index calculation whichever method is applied They are used to aggregate the indices at the different level, hence the quality of index numbers depends on the quality of weights Weights represent the hierarchical structure of industrial production in the country starting from the commodity at bottom to the sector structure on top Weights should be updated timely as the sector structure changes over the time. Updating the weight is an essential part of index system

Sources and methods of weighting Variable for weighting : Value added and output Valuation - at basic prices Data source: For benchmark – data from a complete enumeration For updating - survey data (in developed countries administrative data, or tax data are used) Details of data required: VA and commodity production data at establishment level

Computation of weights Weight is the share of commodity, establishment, ISIC branch in total value added Weights are needed to compute the average indices at higher level Weights are computed from top to bottom; but indices are constructed by aggregating from bottom to top At all levels, share of VA to total is computed, except for commodities, where share of commodities in total value of production (output) is calculated to assign the weight

Volume relatives (qt/q0) Establishment I Commodity Volume relatives (qt/q0) Weights (w)   Index Aggregation of commodity index to establishments A 1.2879 0.40 5.152 B 1.4286 0.60 8.572 Establishment index 1.3723 x 100  137.23 Establishment II C 1.20 0.35 0.4200 D 1.10 0.65 0.7150 1.1350 x 100  113.50 ISIC group (say 1511) Establishment Aggregation of establishment index to ISIC branch I 1.3723 0.23 31.56 II 0.18 20.43 Industry index - weighted average establishment indices 0.41 51.99 (51.99/0.41)x100 126.81

Fixed weight versus chained index Fixed weight indices have their weight structure fixed at a particular point in time. The term chain linked indices refers to the updating of the weights and linking two index series together to produce a time series. As a general recommendation, the chain-linking approach (the chained Laspeyres-type volume index), is the recommended one for the compilation of the IIP. Industry level weights should be updated annually and product group weights should be updated frequently, at least every 5 years.

Benchmarking: Divergence of sub-annual and annual index series

Reasons for divergence Difference in coverage and sample Difference in definition and variables output replaces the value added Accounting period Calendar year versus accounting year effect Estimation method, non-response treatment, imputation, etc.

Seasonal Adjustment: Seasonally adjusted and original series - Industrial Production Index

Concluding remarks IIP are widely used in international statistical system not only for monitoring growth but also as an important supplementary data for estimation of level and structure indicators Major quality issues are international comparability in terms of classification, methods of compilation and timeliness, especially in terms of weight updating and also seasonal adjustment

The sub-annual data should be benchmarked to the annual MVA as soon as it becomes available. The benchmark time series must be revised based on the revision policy Countries are encouraged to compile IIP on monthly basis in order to get early information on economic trends

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