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Space-Time (In)Consistency in the National Accounts: Causes and Cures

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  • Nicholas Oulton

Abstract

In early 2014 the World Bank published the main findings of the 2011 International Comparison Program (ICP). The result was surprising: the world is apparently richer and more equal than we would have expected based on extrapolating from the earlier, 2005 ICP. This is an example of what I call space-time inconsistency in the national accounts. Though the 2011 findings drew attention to this problem, it is certainly present in earlier rounds of the ICP, for example in comparing the 1980 with the 2005 ICP. In this paper I show that the national accounts are in principle space-time consistent if the consumer's utility function (or the revenue (GDP) function) is homothetic and if Divisia price indices are used to deflate nominal GDP or consumption, both over time and across countries. It follows that any observed inconsistency must be 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. I develop indicators of the size of non-homotheticity and chain index approximation error using detailed, unpublished data from the 2005 ICP. I conclude that errors in price indices are most likely the major cause of inconsistency.

Suggested Citation

  • Nicholas Oulton, 2015. "Space-Time (In)Consistency in the National Accounts: Causes and Cures," CEP Discussion Papers dp1349, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1349
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    References listed on IDEAS

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    1. Robert C. Feenstra & Alan Heston & Marcel P. Timmer & Haiyan Deng, 2009. "Estimating Real Production and Expenditures across Nations: A Proposal for Improving the Penn World Tables," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 201-212, February.
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    5. Oulton, Nicholas, 2008. "Chain indices of the cost-of-living and the path-dependence problem: An empirical solution," Journal of Econometrics, Elsevier, vol. 144(1), pages 306-324, May.
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    More about this item

    Keywords

    PPP; Divisia; Konüs; price index; path-dependence; consistency;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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