Do unit value export, import, and terms-of-trade indices misrepresent price indices?

Export and import unit value indices (UVIs) are based on data from customs documentation and are so named because they take as their building blocks, for individual commodity groups, the ratio of the unit value in the current to the reference period. They measure, for individual commodity groups, the change over time in the total value of shipments divided by the corresponding total quantity. These elementary-level unit value ratios--also, and hereafter, referred to as (elementary) UVIs--are subsequently aggregated across commodity groups using standard weighted index number formulas where the weights are the relative shares of the commodity group in total exports/imports. Export and import price indices (PIs) have as their building blocks, at the elementary level, the price change of well-defined representative items derived from establishment surveys. Export and import UVIs by necessity differ from PIs because of their source data.

This paper considers whether export and import UVIs derived from customs data, and commonly used as surrogates for export and import PIs, represent or misrepresent such price changes. UVIs as measures of price changes of imported and exported goods serve economic analysis in many important ways. They are used as short-term indicators of inflation transmission, to measure changes in a country's terms of trade (ToT) (effect), and as deflators of export and import values to yield measures of changes in export and import volumes. Yet, in spite of their widespread use they are subject to well-recognized errors and bias. (1) The issue of concern is whether such bias misleads economists in their economic analysis to the extent that their compilation and use should not be recommended. Also of importance is to consider what might be done by statistical agencies if UVIs are found wanting.

Bias in UVIs is mainly attributed to changes in the mix of the heterogeneous items recorded in customs documents, but may also arise from the poor quality of recorded data on quantities. The former is particularly important given the increasing differentiation of products and turnover of differentiated products that is a feature of modern markets. UVIs may suffer further due to an increasing irrelevance of the source data with first, increasing proportions of trade being in services and by e-commerce, and hence not covered by customs data, and second, a constraint on the coverage of such data for countries in customs and monetary unions, for which intra-union trade date may no longer be regularly collected.

Few deny, including United Nations (1981), (2) that narrow specification PIs provide the best measures of relative price change and that, a priori, there are potentially significant biases in using customs unit values to measure price developments in international goods trade. Yet, unit value proxies for narrow specification price data collected from establishments are still used because they are by-products of existing customs administration systems and have relatively low incremental cost compared with the price surveys of establishments needed for narrow specification prices.

The concern over bias in UVIs is not new. Early critical studies of unit value bias as measures of import and export price changes and ToT include Kravis and Lipsey (1971 and 1985). The United States discontinued publication of unit value trade indices in 1989 due to the concern over bias and introduced trade PIs based on establishment surveys. A move away from UVIs based on customs documentation has also been prompted by the introduction of a customs union for the euro area. (3)

I. UVIs and Their Bias

This section first outlines the nature of the bias in a unit value index (UVI) arising from changes in the compositional product mix, then considers it more formally by means of the properties of the UVI in relation to the main axiomatic tests used in index number theory to justify formulas, and finally in relation to economic theory.