This article discusses the advantages of chain-weighted indexes and the challenges posed by chained dollars, outlines further steps that BEA will be taking to address these issues in the 2003 comprehensive revision of the national income and product accounts (NIPAs), and provides suggestions for using chained dollars in ways that reduce biases and errors in forecasting and other applications where components need to be aggregated. Highlights of this article include the following:
- Chain-weighted indexes have provided a more accurate picture of the current economic recovery than fixed-weighted indexes. Real GDP as measured by the chain-weighted index has grown at a 2.7-percent annual rate during this recovery, a relatively slow growth rate compared with past recoveries.3 However, using a fixed-weighted (1996) measure, growth would have been overstated by 1.6 percentage points, resulting in a misleadingly robust 4.3-percent growth rate.
- Because the chain-type indexes are weighted using current-period prices, the current-dollar shares of GDP provide a more accurate measure of the relative importance of components and are preferable to chained-dollar shares. Chained-dollar estimates, however, have provided a reasonable approximation of the relative importance of the five major components of GDP in recent quarters.
- For the major components of GDP, when we simulate the effects of using chained dollars for forecasts and for calculations of contributions to growth, we find relatively small errors for recent periods.
- For more detailed components—especially for goods and services with declining prices and rapidly rising real sales, such as computers and other hightech products—the use of chained-dollar levels tends to overstate their relative importance and their contributions to GDP growth.
- Contributions to GDP growth of special interest aggregations, such as the sum of investment in computers and other high-tech equipment, are overstated using chained-dollar levels. Between 1995 and 2000, a simple aggregation by adding up chained-dollar estimates would suggest that hightech investment accounted for about 21 percent of GDP growth rather than its actual contribution of about 17 percent.
- The use of current-dollar levels as GDP weights or simple “short-cut” chain-type indexes can virtually eliminate aggregation errors in forecasts and in estimates of contributions to GDP growth.
- In December, BEA will present additional tables that emphasize percent changes in the chain indexes for output and prices. It will also provide expanded tables of contributions to growth, of chain indexes for quantities and prices, of current-dollar estimates, and of current-dollar composition of GDP, which approximates the weights used in the calculation of real GDP that uses chain indexes.
- BEA will continue to make chain indexes available for all components of GDP, but the published tables will no longer show chained-dollar aggregates for certain components, such as computers, that do not provide a reasonable approximation of their relative importance in calculating the real GDP estimates. Fixed-weighted GDP estimates, which BEA has been disseminating as underlying detail, will also be discontinued