Transcript Chain Linking

Chain-linking and rebasing of national
accounts
Expert Group Meeting on National Accounts
Cairo May 12-14, 2009
Presentation points
The need for rebasing
Constant price estimates use the price relatives of a particular year to
weight together the volume components
Each base year gives a different perspective resulting from those
weights
Relative prices in the base period tends to become progressively less
relevant
Therefore it is necessary to update the base period to adopt weights
that are more consistent with current condition
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What is behind the change
From Supply Side
Structural change in production structure in the economy over a
period of time
Structural changes in relative prices of various products in the
economy over a period of time
Continuous developments and innovations
Obsoleteness of many old products
Non-comparability of goods and services between far apart periods
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What is behind the change
From Demand Side
Structural change in the consumption patterns
Structural change in the utilization and acquisition of capital goods
Changes in the openness of the country to the world
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Due to the continuous changes in structure of
Production and consumption it is desirable to do
more frequent rebasing
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Rebasing
The change of the base year implies
Changing the price and quantity base for the individual price and
quantity relatives
Updating the weights used in aggregating the individual quantity
relatives into sub-indices and to aggregate these sub-indices into
more aggregated indices
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Rebasing
In principle, the best indices to be used for rebasing are Paasche
price indices and Laspeyres volume indices
In practice, it is not possible to construct them
Thus the national accountants are forced to construct approximates
for these indices
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Constructing the approximates
Making the compilations at a possible detailed level, and
performing the aggregation from this detailed level to the
main national accounts aggregates
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Rebasing in practice
Changing the reference period for individual price and volume indices
used from being equal to the old base year to being equal to the new
base year
Performing the aggregation from this detailed compilation level to
obtain the national accounts aggregates
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Rebasing in practice
For the economic activities or aggregates for which the constant
price estimates are obtained by revaluation, a change of base year
involves replacing the old base prices currently used with the new
base prices for the same items
For the economic activities or aggregates for which the constant price
estimates are obtained through deflation, a change of base year
involves changing the reference period for the deflators used at the
most detailed level
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How often the base period should be changed
Practices in this respect vary considerably, with some countries
keeping the same base period for as many as 10 years or 5 years,
and some changing the base period every year
It is desirable to change base periods frequently, especially in times
of large changes in relative prices and rapid economic development
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How often the base period should be changed
Changing the base too frequently also can sometimes cause
problems when individual prices and quantities fluctuate in a way
so that the changes in relative prices occurring in earlier periods
are reversed in later periods
In this case period-to-period chain-linked indices in general will not
return to its initial level
Generally, It is not advisable to go for rebasing more frequently
than a year
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Impacts on the growth rates
Normally relative prices tend to change in a way that is inversely
related to changes in relative volumes
As a result, the overall measure of growth based on a Laspeyres
fixed-base formula will tend to overstate the growth in years after
the base year compared with the growth rate which would be
calculated if a more up-to-date set of relative prices were used
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Impacts on the growth rates
Growth rates observed for major aggregates will change from
those, which were based on earlier base year and previously
published
Changes can be very significant- which can lead to problems for
national accountants in trying to explain why the constant price
GDP growth rates have been “revised” compared with those
previously published
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Impacts on the growth rates
The SNA, 1993 has recommended compilation of chain volume
indices to overcome this problem
However, countries in the region are still using system of fixed base
years
To form consistent time series the old series need to be linked to
the series based on the new base year, resulting in a set of chainlinked time series
It should kept in mind that the chained estimates are no additive
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Linking of National Accounts Series
All countries are compiling national accounts aggregates at current
and constant prices
They also update the base year periodically
Several countries have breaks in their national accounts series
resulting from the changes in base year
The breaks have resulted in incomparability of the series based on
different base year
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Linking of National Accounts Series
National accounts aggregates should be linked taking into account
the alternative methods adopted for various components
Revaluation: Multiplying quantities at the product level for a given
year with the prices of the new base year
If price deflation: Changing the reference period for the deflators
(link price deflators) used at the most disaggregated detailed level
If deflation: Back series should be obtained by double deflation
If a single indicator: Back series has also to be obtained by single
indicator
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Linking of National Accounts Series
Linking the series is not easy in practice because
While revising the base the compilers revise the compilation
methodologies also
Alternative data base become available
Improvements in the coverage is introduced in the new series Linking
the series is not easy in practice because
The compilers may adopt new recommendations pertaining to new
international standards provided by the latest International System of
National Accounts
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Suggested solutions
Countries have to look into various details of all the
individual aspects carefully
If some activities were missing in the earlier series then numbers
relating to this activity have to be seen in the right perspective and
then plugged into the back series
If another alternative set of data captures the activity more
adequately, then change in data base need to be made for the current
period as also for the possible past years
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Linking of National Accounts Series
In conclusion,
No single solution exists for all types of problems
Countries have to consider the use of annual chaining as
recommended by the SNA; if not, the base year should not be more
than 5 years old
Countries should carefully choose the base year, it should be a normal
year having no dramatic changes
Countries need to consider each of the problem issues with proper
care and determine solutions keeping general principles in mind and
best practices at hand
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