Effects of Relative Prices on Contributions to the Level and Growth of Real GDP

• Main Author: Dumagan, Jesus C.
• Format: text
• Published: Animo Repository 2016
• Subjects: Real GDP; relative prices; additivity; index numbers; Growth and Development
• Online Access: https://animorepository.dlsu.edu.ph/res_aki/71; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1050&context=res_aki
• Institution: De La Salle University

Existing procedures for GDP in chained or in constant prices ignore relative prices – ratios of industry GDP deflators to the economy’s GDP deflator – and, consequently, yield economically misleading results by understating (overstating) level contributions of industries with above (below) average relative prices, at the same time understating (overstating) growth contributions of industries with rising (falling) relative prices. These are illustrated by US GDP in chained prices and Philippine GDP in constant prices. However, the above misleading results could be mitigated by this paper’s general formulas for level and growth contributions applied to the same GDP. While allowing for differences and changes in relative prices, these general formulas encompass existing formulas as special cases of constant relative prices. In principle, relative prices convert real GDP of industries to the same (i.e., homogeneous) units so that they can be added to equal (i.e., additive) aggregate real GDP. Without relative prices – and, therefore, no homogeneity and no additivity – industry contributions to the level and growth of aggregate real GDP are questionable.