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Space-time (In)consistency in the national accounts: causes and cures

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  • Oulton, Nicholas

Abstract

Space-time consistency in the national accounts means that the relative size or standard of living of a country today is the same whether we measure it by an earlier PPP extrapolated to the present using relative inflation rates from the national accounts or by the current PPP. Empirically, space-time inconsistency is extensive. Theoretically, space-time consistency prevails if the consumer’s utility function (or the revenue (GDP) function) is homothetic and if Divisia price indices are used to deflate nominal consumption (or GDP), both over time and across countries. Hence the inconsistency we observe is due to either (a) non-homotheticity in consumption (or production); (b) approximation error when discrete chain indices are used instead of continuous Divisia indices; or (c) errors in domestic price indices and PPPs. Based on detailed data from the 1980 and 2005 International Comparisons Program and the Penn World Table, I conclude that errors in price indices and PPPs are the major cause of inconsistency.

Suggested Citation

  • Oulton, Nicholas, 2015. "Space-time (In)consistency in the national accounts: causes and cures," LSE Research Online Documents on Economics 86285, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:86285
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    More about this item

    Keywords

    PPP; Divisia; Konüs; price index; path-dependence; consistency;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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