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Implementing Weights for Additivity of Chained Volume Measures in the National Accounts

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  • Dumagan, Jesus C.

Abstract

In current practice, subaggregate chained volume measures (CVMs) are neither weighted nor additive. This paper derives and implements "weights" for weighted subaggregate CVMs to be additive (i.e., their sum equals aggregate CVM) because without weights, nonadditivity permits the nonsensical result that a subaggregate CVM could exceed aggregate CVM. The weights are ratios of subaggregate to aggregate chained price deflators that exceed, equal, or fall below 1 depending on relative prices. CVMs in current practice are additive in the special case of constant relative prices when all weights equal 1. If relative prices change, weights do not equal 1 and their use avoids nonadditivity and the above nonsensical result. Empirically, they have widespread implications because CVM is now implemented in over 40 countries. Application to actual GDP data shows significant distortions of GDP composition due to nonadditivity of subaggregate CVMs from ignoring relative price changes. Among this paper`s formulas for additive weighted subaggregate CVMs, the one based on Paasche price and Laspeyres quantity indexes is recommended for practical implementation.

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Bibliographic Info

Paper provided by Philippine Institute for Development Studies in its series Discussion Papers with number DP 2011-09.

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Length: 16
Date of creation: 2011
Date of revision:
Handle: RePEc:phd:dpaper:dp_2011-09

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Keywords: additivity; chained volume measure; Government Service Insurance System (GSIS); Social Security System (SSS); GDP in chained prices; chained index;

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  1. Fisher,Franklin M. & Shell,Karl, 1998. "Economic Analysis of Production Price Indexes," Cambridge Books, Cambridge University Press, number 9780521556231, April.
  2. Dumagan, Jesus C., 2002. "Comparing the superlative Tornqvist and Fisher ideal indexes," Economics Letters, Elsevier, vol. 76(2), pages 251-258, July.
  3. Dumagan, Jesus C., 2008. "Avoiding Anomalies of GDP in Constant Prices by Conversion to Chained Prices: Accentuating Shifts in Philippine Economic Transformation," Discussion Papers DP 2008-24, Philippine Institute for Development Studies.
  4. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
  5. Balk, Bert M., 2004. "Decompositions of Fisher indexes," Economics Letters, Elsevier, vol. 82(1), pages 107-113, January.
  6. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 217-33, June.
  7. Dumagan, Jesus C., 2010. "Computing Additive Chained Volume Measures of GDP Subaggregates," Discussion Papers DP 2010-16, Philippine Institute for Development Studies.
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Cited by:
  1. Dumagan, Jesus C., 2011. "Deriving Weights for Additivity of Chained Volume Measures in the National Accounts," Discussion Papers DP 2011-08, Philippine Institute for Development Studies.

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