United Nations Statistics Division/DESA

International Recommendations for International Recommendations for the Index of Industrialthe Index of Industrial

Production (IIP)Production (IIP)

History

Index of Industrial Production has been calculated since the 1920s UNSD has collected series going back to 1938

Methodology was described in 1950 UN Manual on “Index of industrial production” Number 1 in series of publications on

international recommendations and guidelines (Series F)

History

The 1950 manual was not updated However, related guidance materials

were published: Guidelines on Principles of a System of

Price and Quantity Statistics, 1977 Manual on Producers’ Price Indices for

Industrial Goods,1979

History

Why a revision of the IIP publication? The previous UN publication on the IIP was

published in 1950 Methods and approaches have changed

over time (e.g. fixed weight vs. chain approaches, volume aggregation vs. deflation, etc.)

History

Why a revision of the IIP publication? Various related standards and

international recommendations have been updated over time: International Recommendations for

Industrial Statistics 2008 System of National Accounts 2008 Producer Price Index Manual Classifications (ISIC Rev.4, CPC ver.2)

These changes need to be reflected in the updated IIP text

Publication structure

Part I includes a description of the international recommendations, covering scope, fundamental concepts, etc. It is encouraged that countries comply with the

recommendations set out in Part I.

Part II includes international guidance to assist countries in implementing these recommendations It presents a set of methods (categorized as

‘preferred’, ‘alternative’ and ‘other’) and variables for each ISIC Rev. 4 class in scope of this publication for the compilation of an IIP, based on current country practices

Key issues/recommendations

1: Statistical units, classifications & business register Recommendations outlining - Statistical Units to

use; classifications; use of business registers; and data sources (incl. administrative data sources).

2: Frequency Publication recommends monthly compilation of

the IIP so that turning points in economic activity can be identified as early as possible

Key issues/recommendations 3: Scope of the IIP:

Scope is defined to cover activities in sections B - E of ISIC Rev.4, i.e. Mining and quarrying, Manufacturing, Electricity, gas steam and air-conditioning supply, as well as water supply, sewerage, waste management and remediation activities Section E contains new areas for inclusion in

the IIP This scope coincides with the scope of the

International Recommendations for Industrial Statistics (IRIS) 2008, which includes the index numbers of industrial production in its list of recommended indicators

Key issues/recommendations 4: Index formula

Laspeyres index is recommended Preferred due to feasibility over Paasche or

Fischer index Chain linked, rather than fixed base indices are

recommended

5: Weights and updates Annual update of weights should be carried out

to provide an up-to-date weighting structure for the index.

Weights should ideally be National Accounts value added figures – adjustments necessary to make them timely available.

Key issues/recommendations

6: Calculation method

Deflation should be used to obtain volume estimates from value data, rather than volume extrapolation method

PPI is recommended as deflator Deflation should be done at lowest level, i.e. 4-

digit industry level

Volume aggregation still works for areas with limited number of products.

Key issues/recommendations 7. Variables to be used

To approximate industrial production for the IIP, output measures (value or physical quantity of output) are preferred over input measures (labour or materials consumed) E.g. relationship between labour and production

value is affected by various factors, including quality, efficiency etc.

The publication provides suggestions for preferred, alternate and other methods for the use of variables in the IIP calculation. Suggestions are specific for each ISIC industry at

4-digit level

Key issues/recommendations

8: Data adjustments

Adjustments should be made for quality changes Either through the correction of PPI used in

deflation, or by adjusting input data when volume

aggregation is used

Data series should be produced as work day adjusted as well as seasonal adjusted series

Key issues/recommendations 9: Dissemination

The publication outlines elements / requirements for the dissemination of IIP data

General requirements for international reporting are set in the International Recommendations for Industrial Statistics (IRIS) 2008

UNSD data collection will continue at 2-digit ISIC level for annual and quarterly data, 1-digit ISIC level for monthly data Currently for raw (unadjusted) data only Will switch to ISIC Rev.4 for production of regional IIP

Major changes Scope

Enlarged definition of “industry” Recommended calculation method

Deflation vs. volume extrapolation Frequency of weight updates

Annual updates vs. 5-yearly updates Chain linking vs. fixed-weight approach

Other recommendations, such as on seasonal adjustment or dissemination issues reflect an update of previous recommendations as well

Two main approaches to calculate the IIP

Purpose of the IIP Purpose: to reflect the volume

developments in value added over time

Difficult: impossible to calculate value added at high frequency and with appropriate timeliness

Solution: to obtain the best approximation of short-term movements in value added

Goal Measure volume changes over

time The measurement should not

reflect price changes in the measurement period

Options 1) Build a measurement that uses

only volume changes at detailed level “Volume extrapolation”

2) Use a price deflator to remove the price component from an overall value measure, isolating the volume component “Deflation”

Recommended approach The 1950 IIP manual relied on the

volume extrapolation approach The 2010 IIP manual

recommends mostly the deflation method Recommendations depend on

industry (see chapter 7)

What separates the two approaches? Calculation method (formula) Data requirements

Data availability Work load Stability, ability to adapt

Volume extrapolation concept : utilize the movements in

volumes directly to calculate an IIP suitable : volume variables formula : IIP=Q1/Q0 (at

elementary/product level) Use weights to aggregate to higher

levels

Volume extrapolation Possible input data:

Output variables Physical quantity of output (at individual

product Input variables

Labor input Materials consumed

While input data are sometimes easier to obtain, they assume a fixed relationship between input and output

Volume extrapolation Data requirements

Data need to be available for a detailed set of products Volume extrapolation starts at the product

level, then aggregates through product groups and industries

Products have to be representative for the respective industries fro which the IIP is compiled

Work load High due to need for detailed product data

(collection and processing)

Volume extrapolation Stability

In some areas, shifting of production between products (or product groups) can negatively influence the data quality Example: pharmaceuticals

Ability to adapt Difficult to account for quality

changes

Deflation method concept : isolate the volume component

from value variables suitable : value variables formula :

IIP=(Value1/Price index) / Value0

=(∑P1Q1/Price Index) / ∑P0Q0 At level where price index is available

Deflation method

Possible input data: Output variables:

Value of output Value of output sold

Needed only at more aggregated level than data for volume extrapolation

Deflation method Data requirements

Data need to be available only at a higher level of aggregation

BUT: “Appropriate” deflator (price index) needs to be available at this level too

Deflation should take place at lowest level possible Typically: 4-digit ISIC level; could be

product group level

Deflation method Work load

Reduced (less detailed data collection and processing)

BUT: price index needs to be calculated Responsibility shifts to another area “Duplication” of work can be avoided

Deflation method Stability

Price movements are more stable than quantity movements in many areas

Deflation provides a better tool (while investing same amount of work) to calculate IIP for areas with frequently/seasonally shifting product patterns

Ability to adapt Quality effects are accounted for in the

deflator (price index)

Recommendation The IRIIP 2010 recommends the

deflation method as the preferred approach to calculation of the IIP

Exceptions are made by industry, e.g. if only a small set of products exist and if quality changes are not a major concern Chapter 7 of the publication provides

recommendations by industry, including choice of variables