1301.0 - Year Book Australia, 2007
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 24/01/2007
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Contents >> National Accounts >> Volume or 'real' GDP

VOLUME OR 'REAL' GDP

The reason for having volume 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 Australian Bureau of Statistics (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.

Volume estimates, formed through annual reweighting are not generally additive. In other words, component 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 uses the latest base year as the reference year (i.e. the year when the annual volume estimate equals the current price value). Re-referencing changes the level of the 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: Australian National Accounts, Introduction of Chain Volume and Price Indexes (5248.0). That paper describes chain volume measures, 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.

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