CHAIN VOLUME OR 'REAL' GDP
Chain volume measures were introduced into the Australian national accounts in 1998. They were first presented as experimental measures for the expenditure components of GDP in the December quarter 1997 issue of Australian National Accounts: National Income, Expenditure and Product (5206.0) and were an addition to the longstanding constant price estimates which were still the 'official' volume estimates. Subsequently, in the September quarter 1998 issue of 5206.0, the constant price estimates of both the expenditure and production components of GDP were replaced with chain volume measures and they became the 'official' volume estimates of the Australian Bureau of Statistics (ABS).
The reason for having either chain volume or constant price estimates in the national accounts is to provide time series of expenditure and production aggregates which are free of the direct effects of price change. All the current price aggregates of expenditure and production appearing in the national accounts are estimates of the sums of the values of individual transactions. Each of these transactions has two components: a price and a quantity. From one period to another the quantities and prices comprising the transactions change. This means that when the current price value of an aggregate, such as GDP, in one period is compared with the current price value in another period, the difference between them usually reflects both changes in quantity and changes in price of the constituent transactions. In order to estimate by how much the 'volume' of GDP has changed between the two periods we need to measure the value of GDP in each period using the same unit prices.
For many years the ABS derived constant price estimates as a means of measuring changes in the volumes of aggregates. Constant price estimates are derived by fixing the unit prices of goods and services to those of some base year. These base year unit prices are effectively the weights used to combine the quantities of the different goods and services purchased or produced. The unit prices of different goods and services tend to grow at different rates - some at dramatically different rates. For example, the prices of computer equipment are estimated to have declined by about 92% between 1989-90 and 2003-04, while the prices of most other goods and services have increased. Therefore, over time, the price relativities of some goods and services change appreciably. This adversely affects the usefulness of constant price estimates for periods distant from the base year, and implies that the base year used to derive constant price estimates needs to be changed from time to time. It was ABS practice, in common with many other national statistical agencies, to change the base year every five years. However, it has been found that rebasing every five years is commonly insufficient, and hence the latest international standards recommend rebasing every year and linking the resulting indexes to form annually reweighted chain volume measures.
Chain volume estimates are not generally additive. In other words, component chain volume estimates do not usually sum to a total in the way original current price components do. In order to minimise the impact of this characteristic, the ABS is using the latest base year as the reference year (i.e. the year when the annual chain volume estimate equals the current price value). Re-referencing changes the level of the chain volume estimates, but does not of itself change the growth rates. By adopting this approach, non-additivity does not apply to the reference year or the following year.
The decision to replace all ABS constant price estimates with chain volume measures was announced in March 1998 in Information Paper: Introduction of Chain Volume Measures in the Australian National Accounts (5248.0). That paper describes what chain volume measures are, their advantages and disadvantages with respect to constant price estimates, the advantages and disadvantages of different chain volume formulae, and the results of an empirical analysis.