RDP 9407: Explaining Import Price Inflation: A Recent History of Second Stage Pass-through Appendix 1: Data

All data series are quarterly from 1971:2 to 1993:4.

(a) Retail Prices of Imported Consumption Goods

For the years in which it is available, the retail import price is represented by “items wholly or predominantly imported” in the CPI. Because the sample size was insufficient for econometric analysis, a proxy was constructed and spliced with the actual series to provide additional observations. This was done by removing expenditure classes from the All-groups CPI that were thought not to contain a significant proportion of imports. The remaining expenditure classes were then combined (with the same relative contributions as in the All-groups CPI) to form the proxy series of retail import prices.^[37]

Changes in the proxy series match closely those of the published series. However, during the major currency depreciation of 1985/86, the rate of change in the proxy is consistently lower than that of the actual series. Given that the series is spliced prior to this episode, and that exchange rate movements were less volatile before the float, it is contested that tests of pass-through are not biased towards rejecting completeness.

(b) Prices of Consumption Imports Over the Docks

A free-on-board import price is used. For the period from 1982:3, the ABS import price index (IPI) for consumption goods is used. Prior to this, the IPI was compiled by the RBA. Because the RBA only published price series for major commodity groupings, an IPI for consumption imports was constructed by removing commodity groups which did not contain predominantly consumption goods.^[38] The relative weights of the remaining items were maintained. It should be noted that the construction of these two series are not identical and therefore they are not strictly comparable.

(c) World Export Prices for Consumption Goods

The world price series is represented by an index of the foreign currency prices of exports of consumption goods from 17 of Australia's major trading partners. Changes in the world price, from which index values are inferred, are calculated as:

where · denotes proportional change; w_i is the average share of consumption goods imported into Australia from 1981:3 to 1986:2 from country i relative to other countries in the sample; and is an index of export price of consumption goods in country i.^[39]

The weights used in the construction of the index are shown below, together with those derived using total imports. Because data on the value of imports classified by commodity and country of origin are not readily available, four-digit Australian Standard Industrial Classification (ASIC) data were used. Industries which were considered to be engaged in the production of consumer goods were identified and their exports included^[40]; these goods account for about 35 per cent of Australia's total merchandise imports during the period. Comparing the weights with those based on total exports it can be seen that a larger proportion of our consumption imports are from Asian countries.

Table A1.1: Country Weights

Country	Type of trade weight
	Consumption imports	Total imports
Japan	0.257	0.259
USA	0.244	0.268
UK	0.075	0.088
Singapore	0.059	0.031
Taiwan	0.059	0.038
Germany	0.055	0.076
New Zealand	0.045	0.044
Hong Kong	0.043	0.026
Italy	0.032	0.033
France	0.026	0.026
Rep. of Korea	0.025	0.017
Netherlands	0.017	0.016
Canada	0.014	0.027
Switzerland	0.013	0.013
Malaysia	0.013	0.012
Sweden	0.013	0.019
Belgium	0.008	0.008

Where possible, a price series for consumer exports was used. For countries where consumer export prices could not be obtained, the index for total exports was used.^[41]

Sources for prices: Bank of Japan, Economic Statistics Monthly; US Department of Labor, Monthly Labor Review; UK, Central Statistical Office, Monthly Digest of Statistics; Taiwan Directorate-General of Budget, Monthly Bulletin of Statistic; The Bank of Korea, Economic Statistics Yearbook; Statistics Canada, Canadian Economic Observer; IMF, International Financial Statistics.

Source for weights: Department of Foreign Affairs and Trade, unpublished.

(d) Effective Exchange Rate

An effective exchange rate is calculated as a geometrically weighted average of the bilateral exchange rates between Australia and the 17 countries represented in the world price index. The weights used are identical to those used in the construction of the world price index. The index is calculated as:

where: Π is the product operator; A_jt is the number of Australian dollars per unit of foreign currency at time t; A_jo is the number of Australian dollars per unit of foreign currency for country j in the base period; and w_j is the weight of country j.

(e) Costs Faced by Importers and Retailers

Five major cost items were considered; these include: unit labour costs, international freight, domestic transport, taxes on international trade and other expenses. While these clearly do not cover all costs incurred in bringing an import to the retail outlet, those that are excluded (such as rental and charges for utilities) account for a relatively small share and fluctuate less frequently.

Labour Costs: Nominal, non-farm unit labour cost was used. This accounts for wages, salaries and supplements, plus payroll tax less employment subsidies, plus fringe benefits tax. Source: Treasury, “Economic Round-up”

International Freight: The price of international freight is estimated using the implicit price deflator for shipment debits in the balance of payments. Prior to September 1974, a measure of the implicit price deflator was obtained by dividing the value of shipment debits at current prices, by the value of imports at constant prices. Source: ABS, Catalogue No. 5302.0

Domestic Freight: The Australian Bureau of Agricultural and Resource Economics' index of freight outward incurred by farmers (from the farm to the docks or store) is used. Source: ABARE, “Indexes of Prices Received and Paid by Farmers”

Taxes on International Trade: An average tariff was calculated as the value of customs duties as a proportion of the value of imports. Source: ABS, Catalogue No. 5206.0 and 5302.0

Other Expenses: Other expenses nominated in a survey of retail business operations and industry performance. Source: ABS, Catalogue No. 8140.0.

(f) Cost Shares

Estimates of the cost shares used in the construction of the cost index incurred by domestic importers are obtained from PSA survey results and from various ABS sources.^[42]

The table below shows estimates of the value of each of the four additive costs as a proportion of turnover. These estimates are obtained from ABS and PSA surveys of the retail industry, and ABS census information about the cost structure of manufacturers. These shares of turnover are then rescaled so that they sum to unity.

Table A1.2: Apportioning Costs for Retail Importers

Item	Proportion of
	Turnover / retail price	Cost index
Unit labour cost[43]	0.15	0.62
International freight[44]	0.04	0.17
Domestic freight[45]	0.03	0.13
Other expenses[46]	0.02	0.08
Total	0.24	1.00

The most important cost faced by an importer of consumption goods is, of course, the landed price of the import. Evidence to a PSA inquiry (PSA 1989, p.74) suggests that the free-on-board price represents between 30 to 50 per cent of the final retail price. Taking the middle of this range, and assuming a mark-up factor of 1.20, it can be seen that the free-on-board price represents approximately 50(≈ 40×1.20) per cent of per unit costs faced by an importer. With an average tariff of 10 per cent, the landed price would account for about 55(=50×1.10) per cent of total per unit costs. This value is of a similar magnitude to our estimate of the limit of second stage pass-through.

Footnotes

Sub-groups and expenditure classes which form the proxy are: processed fruit and vegetables; clothing, except for dry cleaning and shoe repairs; appliances; household textiles; household utensils and tools; motor vehicles; tyres and tubes; alcoholic drinks; personal care products; books, newspapers and magazines; and recreation goods. [37]

Items excluded were: crude materials, inedible; mineral fuels and lubricants; chemicals; machinery except electric; electric machinery apparatus and appliances; and transport equipment. [38]

The index is a weighted sum of percentage changes in the foreign price series so as to minimise the error that results from using weights based on the proportion of expenditure on consumption imports (rather than volumes). [39]

Industries included are: ASIC 2124, 2125, 2131, 2132, 2140, 2153, 2161–2163, 2173–2176, 2185–2190, 2351, 2354, 2356, 2441, 2442, 2451, 2452, 2454, 2459, 2460, 2541, 2542, 2632, 2643, 2762, 2763, 2765, 2766–2768, 2770, 2850, 2864, 3161, 3231, 3245, 3341, 3343, 3351–3353, 3452, 3461, 3462, 3473, 3474, 3481–3483, 3485, 3487. [40]

These countries are: Singapore, Germany, New Zealand, Italy, France Netherlands, Switzerland, Malaysia, Sweden and Belgium. They together account for about 30 per cent of consumption imports during the weighting period. [41]

Australian Bureau of Statistics (ABS) publications: the Manufacturing Census, Retail Survey and Business Operations and Industry Performance. [42]

According to the ABS, Manufacturing Census 1989–90, wages and salaries represent approximately 15 per cent of turnover. [43]

The PSA (1989) suggests that international freight is equal to roughly 10 per cent of the free-on-board price of a consumption import, and that the free-on-board price accounts for approximately 40 per cent of the retail price. It follows that international freight is about 4 per cent of the retail price. [44]

Outward freight and motor vehicle expenses account for approximately 3 per cent of turnover in the ABS, Manufacturing Census 1989–90. [45]

From the ABS, Business Operations and Industry Performance, and estimated to be approximately 2 per cent of sales. [46]