Measure Up: A Better Way to Calculate GDP

Abstract

In the wake of falling commodity prices, the accuracy of GDP growth estimates in some emerging market economies have been subject to debate, in part because of the single-deflation method used to derive volume measures. A volume estimate of GDP is an essential measure of economic activity because it removes the effects of price changes. The System of National Accounts 2008 (2008 SNA) recommends a technique called double deflation. In contrast, single deflation, the deflation with a single price index, is not recommended because it fails to capture important relative price changes that can be significant and may affect the accuracy of GDP estimates. How significant can the error be? This note breaks new ground by providing empirical evidence for the order of magnitude. The note approaches the question by applying single deflation to the GDP data of countries that use double deflation and comparing the results with the official data. Eight case studies are presented: Belgium, Brazil, Canada, France, Japan, Korea, the Netherlands, and the United States. We conclude that errors can be significant, although their direction cannot be predicted accurately, and they vary across countries and over time. We also apply the second-best method of single extrapolation to the same data and find that this method reduces the error in some but not all countries. We briefly outline a step-by-step approach toward adopting double deflation.