Country practices in deriving contributions to growth and changes in inventories

1
Country practices in deriving contributions to
growth and changes in inventories

• Charles Aspden
• Working Party on National Accounts, October 2006

2
Survey of EU and OECD Members

• Reasons
• OECD and Eurostat unable to derive contributions
  to growth in GDP as published by NSOs.
• Concerns about the estimation of changes in
  inventories in both current and constant prices.

3
Annual chain-linking and its implications for
contributions to growth

• Until quite recently, most OECD countries rebased
  their constant price estimates every five or ten
  years, such that the latest base year coincided
  with the reference year. Consequently, their
  constant price estimates were additive for recent
  years and the derivation of the contributions to
  the growth of GDP was straightforward.
• Kit Kit-1 x 100
• GDPt-1

4
Annual chain-linking and its implications for
contributions to growth

• Most OECD countries now derive their quarterly
  volume estimates by rebasing annually and
  chain-linking. (Canada and the US use Fishers
  ideal index and the rest use the Laspeyres index.
  Canada rebases quarterly). Nearly all the
  remaining countries intend to make the change
  soon.
• For most countries that rebase annually or
  quarterly their volume estimates are no longer
  additive, and so the simple formula cannot be
  used.

5
Annual chain-linking and its implications for
contributions to growth

• Countries have adopted different ways of
  overcoming this problem
• Australia and the UK re-reference their volume
  estimates to the latest base year every year.
  Hence their volume estimates are additive for
  recent years and the simple formula applies.
• Other countries using the Laspeyres index
  calculate contributions to growth using estimates
  expressed in the prices of the previous year,
  which are therefore additive, but it means having
  five quarters in previous years prices.
• Canada and the US derive weights that can be
  applied to the growth rates of the components.

6
Annual chain-linking and its implications for
contributions to growth

• The problem for the OECD, Eurostat and other
  users is that it is now difficult, if not
  impossible, for them to derive contribution to
  growth data that are exactly the same as those
  derived by NSOs and the questionnaire does not
  include them.
• Hence, the OECD and Eurostat request countries to
  supply these data for Tables 0101, 0102, 0104 and
  0105 (i.e. 0101 and 0102 of the new
  questionnaire).

7
Deriving annual chain-linked volume estimates for
series that can change sign

• The Laspeyres and Fisher formulae are not
  applicable to series that can take positive,
  negative or zero values. This applies to
• Changes in inventories
• External balance
• GFCF, when a big second-hand sale occurs between
  sectors
• Countries have adopted different ways of dealing
  with this problem
• Differencing the most closely associated
  chain-linked series, i.e. closing and opening
  values for inventories, exports and imports for
  external balance.
• Differencing higher level aggregates, only one of
  which includes changes in inventories
• Do not derive chain-linked volume estimates of
  such series.

8
Deriving annual chain-linked volume estimates for
series that can change sign

• Differencing chain-linked series to obtain the
  target series assumes an additive relationship
  between the three series that is invalid, and so
  this approach can only give an approximate
  estimate of the target series. However, it seems
  plausible to believe that the approximation will
  be better the closer the relationship between the
  three series is in terms of price and volume
  relativities.
• Given that inventory levels generally change by
  only a small percentage over a quarter, the
  composition of the seasonally adjusted levels of
  inventories will generally be almost the same in
  consecutive quarters, implying a near-additive
  relationship between the chain-linked estimates
  of opening and closing levels and the difference
  between them.

9
Deriving annual chain-linked volume estimates for
series that can change sign

• Three countries that use the recommended approach
  are Canada, UK and US. Table 1 compares their
  published annual estimates of chain-linked
  changes in inventories with estimates derived as
  GCF GFCF
• The difference between the two estimates
  generally grows the further they are away from
  the reference year. At 30 years from the
  reference year the difference often exceeds the
  magnitude of the published estimates.
• Sometimes abrupt changes can occur, as it did
  between 1981 and 1982 for Canada.

10
Importance of deriving chain-linked estimates of
changes in inventories

• While contributions to growth of GDP are useful
  they are not an analytical substitute for actual
  volume estimates of changes in inventories.

11
Early 1980s recession in Canada ( Contributions
to growth derived using simple formula)
Quarter Changes in inventories Contribution to GDP growth GDP growth
Q280 2548 0.8 -0.2
Q380 -971 -2.4 0.0
Q480 -86 0.6 1.1
Q181 -2222 -1.5 2.5
Q281 -493 1.2 0.9
Q381 -2044 -1.0 -0.7
Q481 -4156 -1.4 -0.5
Q182 -4482 -0.2 -1.0
12
Early 1980s recession in Canada cont. (
Contributions to growth derived using simple
formula)
Quarter Changes in inventories Contribution to GDP growth GDP growth
Q282 -5739 -0.9 -1.0
Q382 -6231 -0.3 -0.9
Q482 -5854 0.3 -0.9
Q183 -3610 1.6 1.5
Q283 -3638 0.0 2.3
Q383 -1854 1.2 1.1
Q483 -1132 0.5 1.2
Q184 -47 0.7 1.8
13
Results of the surveyTable 2 - contributions to
growth

• About half of the countries the 23 countries that
  responded release contributions to growth data
• Some countries derive one component residually to
  overcome problem with rounding so as to ensure
  perfect additivity. Others do not bother.

14
Results of the surveyTable 3 quarterly changes
in inventories

• About half of respondents release quarterly
  chain-linked changes in inventories. Most use the
  preferred method
• Denmark and Iceland directly chain-link changes
  in inventories
• Czech Republic uses GCF-GFCF
• Netherlands by total final expenditures with and
  without changes in inventories. See comparison
  with GCF-GFCF in Table 1.

15
Results of the surveyTable 3 quarterly changes
in inventories

• Sweden calculates changes in inventories in
  prices of the previous year and then scales up
  according to GDP.
• Most countries derive quarterly current price
  estimates of changes in inventories directly from
  survey data, but quite a few derive them
  residually.
• Of the former group, a few countries have
  described in detail how they go about deriving
  the national accounts estimates from the raw book
  value data collected from surveys. Others
  provided much less detail.

16
Calculating changes in inventories from survey
data

• Basic steps
• Construct end-period deflators
• Deflate book values to obtain constant price
  estimates of opening and closing values
• Difference to obtain constant price changes
• Inflate with centred deflator to obtain changes
  at current prices
• But in order to construct deflators, need to know
  
• how businesses value their inventories. Do they
  use LIFO, FIFO or some other way (e.g. average
  cost, standard cost)
• Turnover rate

17
Conclusions

• Please supply OECD and Eurostat with estimates of
  contribution to growth of GDP
• If you do not release such estimates, consider
  doing so.
• If you do not release chain-linked volume
  estimates of changes in inventories, consider
  doing so.
• Derive chain-linked volume estimates of changes
  in inventories by differencing chain-linked
  opening and closing levels. If no levels,
  consider deriving them.
• For those using inventory survey data (quarterly
  or annual), how well founded are your assumptions
  about the inventory valuation practices of
  businesses?