Presentation points

1. Chain-linking and rebasing of national accountsExpert Group Meeting on National AccountsCairo May 12-14, 2009 Presentation points

2. The need for rebasing • Constant price estimates use the price relatives of a particular year to weight together the volume components • Each base year gives a different perspective resulting from those weights • Relative prices in the base period tends to become progressively less relevant • Therefore it is necessary to update the base period to adopt weights that are more consistent with current condition

3. What is behind the change From Supply Side • Structural change in production structure in the economy over a period of time • Structural changes in relative prices of various products in the economy over a period of time • Continuous developments and innovations • Obsoleteness of many old products • Non-comparability of goods and services between far apart periods

4. What is behind the change From Demand Side • Structural change in the consumption patterns • Structural change in the utilization and acquisition of capital goods • Changes in the openness of the country to the world

5. Due to the continuous changes in structure of Production and consumption it is desirable to do more frequent rebasing

6. Rebasing • The change of the base year implies • Changing the price and quantity base for the individual price and quantity relatives • Updating the weights used in aggregating the individual quantity relatives into sub-indices and to aggregate these sub-indices into more aggregated indices

7. Rebasing • In principle, the best indices to be used for rebasing are Paasche price indices and Laspeyres volume indices • In practice, it is not possible to construct them • Thus the national accountants are forced to construct approximates for these indices

8. Constructing the approximates • Making the compilations at a possible detailed level, and performing the aggregation from this detailed level to the main national accounts aggregates

9. Rebasing in practice • Changing the reference period for individual price and volume indices used from being equal to the old base year to being equal to the new base year • Performing the aggregation from this detailed compilation level to obtain the national accounts aggregates

10. Rebasing in practice • For the economic activities or aggregates for which the constant price estimates are obtained by revaluation, a change of base year involves replacing the old base prices currently used with the new base prices for the same items • For the economic activities or aggregates for which the constant price estimates are obtained through deflation, a change of base year involves changing the reference period for the deflators used at the most detailed level

11. How often the base period should be changed • Practices in this respect vary considerably, with some countries keeping the same base period for as many as 10 years or 5 years, and some changing the base period every year • It is desirable to change base periods frequently, especially in times of large changes in relative prices and rapid economic development

12. How often the base period should be changed • Changing the base too frequently also can sometimes cause problems when individual prices and quantities fluctuate in a way so that the changes in relative prices occurring in earlier periods are reversed in later periods • In this case period-to-period chain-linked indices in general will not return to its initial level • Generally, It is not advisable to go for rebasing more frequently than a year

13. Impacts on the growth rates • Normally relative prices tend to change in a way that is inversely related to changes in relative volumes • As a result, the overall measure of growth based on a Laspeyres fixed-base formula will tend to overstate the growth in years after the base year compared with the growth rate which would be calculated if a more up-to-date set of relative prices were used

14. Impacts on the growth rates • Growth rates observed for major aggregates will change from those, which were based on earlier base year and previously published • Changes can be very significant- which can lead to problems for national accountants in trying to explain why the constant price GDP growth rates have been “revised” compared with those previously published

15. Impacts on the growth rates • The SNA, 1993 has recommended compilation of chain volume indices to overcome this problem • However, countries in the region are still using system of fixed base years • To form consistent time series the old series need to be linked to the series based on the new base year, resulting in a set of chain-linked time series • It should kept in mind that the chained estimates are no additive

16. Linking of National Accounts Series • All countries are compiling national accounts aggregates at current and constant prices • They also update the base year periodically • Several countries have breaks in their national accounts series resulting from the changes in base year • The breaks have resulted in incomparability of the series based on different base year

17. Linking of National Accounts Series • National accounts aggregates should be linked taking into account the alternative methods adopted for various components • Revaluation: Multiplying quantities at the product level for a given year with the prices of the new base year • If price deflation: Changing the reference period for the deflators (link price deflators) used at the most disaggregated detailed level • If deflation: Back series should be obtained by double deflation • If a single indicator: Back series has also to be obtained by single indicator

18. Linking of National Accounts Series Linking the series is not easy in practice because • While revising the base the compilers revise the compilation methodologies also • Alternative data base become available • Improvements in the coverage is introduced in the new series Linking the series is not easy in practice because • The compilers may adopt new recommendations pertaining to new international standards provided by the latest International System of National Accounts

19. Suggested solutions Countries have to look into various details of all the individual aspects carefully • If some activities were missing in the earlier series then numbers relating to this activity have to be seen in the right perspective and then plugged into the back series • If another alternative set of data captures the activity more adequately, then change in data base need to be made for the current period as also for the possible past years

20. Linking of National Accounts Series In conclusion, • No single solution exists for all types of problems • Countries have to consider the use of annual chaining as recommended by the SNA; if not, the base year should not be more than 5 years old • Countries should carefully choose the base year, it should be a normal year having no dramatic changes • Countries need to consider each of the problem issues with proper care and determine solutions keeping general principles in mind and best practices at hand