Issues, tips on their use, and upcoming changes

Survey of Current Business, Nov, 2003 by J. Steven Landefeld, Brent R. Moulton, Cindy M. Vojtech

BEA's introduction of chain-weighted indexes in 1996 significantly improved the accuracy of the U.S. estimates of the growth in real gross domestic product (GDP) and prices. These indexes use up-to-date weights in order to provide a more accurate picture of the economy, to better capture changes in spending patterns and in prices, and to eliminate the bias present in fixed-weighted indexes. A measure of their success is the widespread adoption of such indexes in economic measurement in other U.S. economic statistics and the near-universal movement by other industrial nations toward the use of such indexes for computing real GDP.

The move to chain-weighted indexes has not been painless. Such indexes are computationally difficult to use and do not provide the advantages of additivity that are present in fixed-weighted indexes. In order to provide some of the characteristics of fixed-weighted indexes, BEA developed chained-dollar indexes that are derived by multiplying the chain-weighted indexes by the current-dollar values of a specific reference year (currently, 1996). (1) For most components of GDP, these chained-dollar estimates provide a reasonable approximation of the component contribution to real GDP growth and of the relative importance of the components of GDP. Chained-dollar estimates also offer a limited ability to sum up components in user-defined groups such as GDP excluding government. However, for some components--such as computers and other high-tech equipment with rapid growth in real sales and falling prices--chained-dollar levels (as distinct from chain-weighted indexes and percent changes) overstate the relative importance of such components to GDP growth. (2) These problems have led to difficulties in using the chained-dollar measures in important applications of national accounts data, such as forecasting and interpreting economic changes.

This article discusses the advantages of chain-weighted indexes and the challenges posed by chained dollars, outlines further steps that BEA will be taking to address these issues in the 2003 comprehensive revision of the national income and product accounts (NIPAs), and provides suggestions for using chained dollars in ways that reduce biases and errors in forecasting and other applications where components need to be aggregated. Highlights of this article include the following:

* Chain-weighted indexes have provided a more accurate picture of the current economic recovery than fixed-weighted indexes. Real GDP as measured by the chain-weighted index has grown at a 2.7-percent annual rate during this recovery, a relatively slow growth rate compared with past recoveries. (3) However, using a fixed-weighted (1996) measure, growth would have been overstated by 1.6 percentage points, resulting in a misleadingly robust 4.3-percent growth rate.

* Because the chain-type indexes are weighted using current-period prices, the current-dollar shares of GDP provide a more accurate measure of the relative importance of components and are preferable to chained-dollar shares. Chained-dollar estimates, however, have provided a reasonable approximation of the relative importance of the five major components of GDP in recent quarters. (4)

* For the major components of GDP, when we simulate the effects of using chained dollars for forecasts and for calculations of contributions to growth, we find relatively small errors for recent periods.

* For more detailed components--especially for goods and services with declining prices and rapidly rising real sales, such as computers and other high-tech products--the use of chained-dollar levels tends to overstate their relative importance and their contributions to GDP growth.

* Contributions to GDP growth of special interest aggregations, such as the sum of investment in computers and other high-tech equipment, are overstated using chained-dollar levels. Between 1995 and 2000, a simple aggregation by adding up chained-dollar estimates would suggest that high-tech investment accounted for about 21 percent of GDP growth rather than its actual contribution of about 17 percent.

* The use of current-dollar levels as GDP weights or simple "short-cut" chain-type indexes can virtually eliminate aggregation errors in forecasts and in estimates of contributions to GDP growth.

* In December, BEA will present additional tables that emphasize percent changes in the chain indexes for output and prices. It will also provide expanded tables of contributions to growth, of chain indexes for quantities and prices, of current-dollar estimates, and of current-dollar composition of GDP, which approximates the weights used in the calculation of real GDP that uses chain indexes.

* BEA will continue to make chain indexes available for all components of GDP, but the published tables will no longer show chained-dollar aggregates for certain components, such as computers, that do not provide a reasonable approximation of their relative importance in calculating the real GDP estimates. Fixed-weighted GDP estimates, which BEA has been disseminating as underlying detail, will also be discontinued.