Transcript Survey of country practices Contributions to growth and

Country practices in deriving
contributions to growth and
changes in inventories
Charles Aspden
Working Party on National
Accounts, October 2006
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Survey of EU and OECD Members

Reasons
– OECD and Eurostat unable to derive contributions to growth
in GDP as published by NSOs.
– Concerns about the estimation of changes in inventories in
both current and constant prices.
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Annual chain-linking and its implications
for contributions to growth
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Until quite recently, most OECD countries rebased
their constant price estimates every five or ten years,
such that the latest base year coincided with the
reference year. Consequently, their constant price
estimates were additive for recent years and the
derivation of the contributions to the growth of GDP
was straightforward.
Kit – Kit-1 x 100
GDPt-1
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Annual chain-linking and its implications
for contributions to growth

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Most OECD countries now derive their quarterly
volume estimates by rebasing annually and chainlinking. (Canada and the US use Fisher’s ideal index
and the rest use the Laspeyres index. Canada
rebases quarterly). Nearly all the remaining countries
intend to make the change soon.
For most countries that rebase annually or quarterly
their volume estimates are no longer additive, and so
the simple formula cannot be used.
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Annual chain-linking and its implications
for contributions to growth

Countries have adopted different ways of overcoming
this problem:
– Australia and the UK re-reference their volume estimates to
the latest base year every year. Hence their volume
estimates are additive for recent years and the simple
formula applies.
– Other countries using the Laspeyres index calculate
contributions to growth using estimates expressed in the
prices of the previous year, which are therefore additive, but
it means having five quarters in previous year’s prices.
– Canada and the US derive weights that can be applied to the
growth rates of the components.
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Annual chain-linking and its implications
for contributions to growth

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The problem for the OECD, Eurostat and other users
is that it is now difficult, if not impossible, for them to
derive contribution to growth data that are exactly the
same as those derived by NSOs and the
questionnaire does not include them.
Hence, the OECD and Eurostat request countries to
supply these data for Tables 0101, 0102, 0104 and
0105 (i.e. 0101 and 0102 of the new questionnaire).
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Deriving annual chain-linked volume
estimates for series that can change sign

The Laspeyres and Fisher formulae are not applicable to series
that can take positive, negative or zero values. This applies to:
– Changes in inventories
– External balance
– GFCF, when a big second-hand sale occurs between sectors

Countries have adopted different ways of dealing with this
problem:
– Differencing the most closely associated chain-linked series, i.e.
closing and opening values for inventories, exports and imports for
external balance.
– Differencing higher level aggregates, only one of which includes
changes in inventories
– Do not derive chain-linked volume estimates of such series.
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Deriving annual chain-linked volume
estimates for series that can change sign
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Differencing chain-linked series to obtain the target series
assumes an additive relationship between the three series that
is invalid, and so this approach can only give an approximate
estimate of the target series. However, it seems plausible to
believe that the approximation will be better the closer the
relationship between the three series is in terms of price and
volume relativities.
Given that inventory levels generally change by only a small
percentage over a quarter, the composition of the seasonally
adjusted levels of inventories will generally be almost the same
in consecutive quarters, implying a near-additive relationship
between the chain-linked estimates of opening and closing
levels and the difference between them.
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Deriving annual chain-linked volume
estimates for series that can change sign

Three countries that use the recommended approach
are Canada, UK and US. Table 1 compares their
published annual estimates of chain-linked changes
in inventories with estimates derived as GCF –
GFCF:
– The difference between the two estimates generally grows
the further they are away from the reference year. At 30
years from the reference year the difference often exceeds
the magnitude of the published estimates.
– Sometimes abrupt changes can occur, as it did between
1981 and 1982 for Canada.
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Importance of deriving chain-linked
estimates of changes in inventories

While contributions to growth of GDP are useful they
are not an analytical substitute for actual volume
estimates of changes in inventories.
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Early 1980s recession in Canada
(* Contributions to growth derived using simple formula)
Quarter
Changes in
inventories
Contribution to
GDP growth*
GDP growth
Q280
2548
0.8
-0.2
Q380
-971
-2.4
0.0
Q480
-86
0.6
1.1
Q181
-2222
-1.5
2.5
Q281
-493
1.2
0.9
Q381
-2044
-1.0
-0.7
Q481
-4156
-1.4
-0.5
Q182
-4482
-0.2
-1.0
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Early 1980s recession in Canada – cont.
(* Contributions to growth derived using simple formula)
Quarter
Changes in
inventories
Contribution to
GDP growth*
GDP growth
Q282
-5739
-0.9
-1.0
Q382
-6231
-0.3
-0.9
Q482
-5854
0.3
-0.9
Q183
-3610
1.6
1.5
Q283
-3638
0.0
2.3
Q383
-1854
1.2
1.1
Q483
-1132
0.5
1.2
Q184
-47
0.7
1.8
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Results of the survey
Table 2 - contributions to growth
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About half of the countries the 23 countries that
responded release contributions to growth data
Some countries derive one component residually to
overcome problem with rounding so as to ensure
perfect additivity. Others do not bother.
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Results of the survey
Table 3 – quarterly changes in inventories
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About half of respondents release quarterly chainlinked changes in inventories. Most use the preferred
method
Denmark and Iceland directly chain-link changes in
inventories
Czech Republic uses GCF-GFCF
Netherlands by total final expenditures with and
without changes in inventories. See comparison with
GCF-GFCF in Table 1.
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Results of the survey
Table 3 – quarterly changes in inventories
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Sweden calculates changes in inventories in prices of
the previous year and then scales up according to
GDP.
Most countries derive quarterly current price
estimates of changes in inventories directly from
survey data, but quite a few derive them residually.
Of the former group, a few countries have described
in detail how they go about deriving the national
accounts estimates from the raw book value data
collected from surveys. Others provided much less
detail.
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Calculating changes in inventories from
survey data
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Basic steps:
– Construct end-period deflators
– Deflate book values to obtain constant price estimates of
opening and closing values
– Difference to obtain constant price changes
– Inflate with centred deflator to obtain changes at current
prices

But in order to construct deflators, need to know
– how businesses value their inventories. Do they use LIFO,
FIFO or some other way (e.g. average cost, standard cost)
– Turnover rate
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Conclusions
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Please supply OECD and Eurostat with estimates of contribution
to growth of GDP
If you do not release such estimates, consider doing so.
If you do not release chain-linked volume estimates of changes
in inventories, consider doing so.
Derive chain-linked volume estimates of changes in inventories
by differencing chain-linked opening and closing levels. If no
levels, consider deriving them.
For those using inventory survey data (quarterly or annual), how
well founded are your assumptions about the inventory valuation
practices of businesses?
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