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 Price 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?