Double Deflation: Theory and Practice

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Double Deflation: Theory and Practice

Research Seminar

Tuesday 27 February 2018, 16:30 — 17:30

Research Seminar

Presented by: Nicholas Oulton, London School of Economics 

National Institute of Economic and Social Research, 2 Dean Trench Street, Smith Square, London SW1P 3HE

Real GDP measured from the output side, GDP(O), should equal real GDP measured from the expenditure side, GDP(E), just as the two estimates of GDP in current prices are necessarily equal (in the absence of errors and omissions). But even in theory this is only the case on the real side if real value added in each industry is measured by double deflation. In the United Kingdom real value added is currently measured by single deflation though there are plans to move to double deflation. This raises question marks over the accuracy of GDP measurement and leads to speculation that some part of the pronounced productivity slowdown in the UK could be due to measurement error. It also leads to doubts over the accuracy of estimates of TFP at the industry level. This paper sets out the theory of double deflation using a matrix algebra treatment based on the framework of the Supply and Use Tables. The context is the UK’s national accounts which measure volume growth by chained Laspeyres indices. We analyse the conditions on prices under which real GDP(O) equals real GDP(E). We consider three alternative methods of implementing double deflation. The preferred method makes use of all the price indices which the Office for National Statistics currently collects: Producer Price Indices, Services Producer Price Indices, Consumer Price Indices, Export Price Indices and Import Price Indices. We will investigate the sensitivity of estimates of real GDP and of real value added at the industry level to different sets of deflators.

Nicholas Oulton is currently a member of the Centre for Macroeconomics at the London School of Economics, a researcher at ESCoE and NIESR and a Fellow at the Office for National Statistics.