THE INTERPRETATION OF UNIT VALUE INDICES UNIT VALUE INDICES AS PROXIES FOR PRICE INDICES

The unit value index (UVI) as compiled in Germany for exports and imports is compared with two other indices, viz. an index of Drobisch which unfortunately is likewise known as 'unit value index' and the 'normal' Laspeyres price index (PI) of exports and imports. The UVI may be viewed as a Paasche index compiled in two stages where unit values instead of prices are used in the low level aggregation stage. Unit values are average prices referring to an aggregate of (more or less homogeneous) commodities. The focus of the paper is on the decomposition of the discrepancy between UVIs and PIs (the 'unit value bias') into a (well known) Laspeyres (or substitution) effect or 'L-effect' and a structural component or 'S-effect' due to substituting unit values for prices. It is shown that amount and sign of S depends on the correlation between the change of quantities of those goods that are included in the aggregate and their respective base period prices. By contrast to L the correlation between quantity and price movement is not relevant for S.