B4.3 Causes of revisions

In document "Last quarter’s GDP growth rate revised up by O 3pp": a typical revision? (Page 47-49)

107. The main sources of the current price revisionswere:

• New and revised source data – the main sources were; the new and revised results of the Annual Business Inquiry (ABI); the improved International Trade in Services (ITIS) inquiry, the coverage of which has been substantially expanded; the use of actual government expenditure data to replace estimated budget data; revisions to wages and salaries data; revisions to data on smuggled goods; and Pension Fund Inquiry revisions.

• Current price Input-Output supply and usebalancing – annual data for the

three approaches to GDP (production, income and expenditure) are balanced through the supply-use framework. The estimates for 2001 were balanced in this way for the first time including the annual benchmarking of various components, data for 2000 were re-balanced to accommodate new data, and selected revisions to 1996-1999 were also allowed, necessitating re-balancing of these years.

VAT MTIC fraud– upward revisions to imports of goods data were made to

account for under-recording in 1999-2003. The revisions involved upward adjustments to imports of £1.7 billion in 1999, £2.8 billion in 2000, £7.1 billion in 2001 and £11.1 billion in 2002. The upward revisions to imports had a downward impact on the level of the expenditure measure of GDP. The effect on balanced GDP cannot be seen directly, however, due to the effects of related revisions made to components of demand, household consumption and GFCF, during the supply-use balancing process, and the effects of other, unrelated revisions.

Table 11: Gross domestic product by category of expenditure at current market prices: revisions

£ million Final consumption expenditure Exports Imports

Gross Total H/H final Government final fixed goods

consumption consumption capital and Total Total expenditure expenditure formation Other1 services goods services Total

ABJQ NMRP NPQS IKBH BOKH IKBC YBHA 1996 511 –590 529 –49 878 0 203 1,076 1997 439 –971 –387 –94 1,405 0 515 –123 1998 698 –922 –302 –65 1,533 0 890 52 1999 959 –277 1,146 –83 2,185 1,679 845 1,406 2000 –208 –7 2,292 –165 1,872 2,650 284 850 2001 1,837 –311 2,353 2,444 3,975 7,110 2,275 913

B

Revisions to Gross Domestic Product

108. The main sources of the revisions to real growthwere:

Annual chain-linking– economic theory suggests that the introduction of

annual chain-linking will tend to have a downwardeffect on growth, compared with a fixed-base (constant price) system. This was borne out by the ONS study (Tuke and Beadle, 2003) in which a chain-linking test-run of the Blue Book 2002 dataset led to a small negative effect on growth in recent years (1997 onwards). The effect was largely due to increased volumes and falling prices for expenditure on and trade in computers, telecommunication equipment and other high-tech goods.

Rebased deflators– the price indices (producer price indices (PPIs), import price indices (IPIs) and export price indices (EPIs)) used to deflate nominal values of GFCF, changes in inventories and trade in goods, and in compilation of the index of production, were updated so that their internal weights reflect the values of 2000 rather than 1995. This updating was done from 1998 onwards, with 1998 as the link year. The deflators were re-referenced to 2000=100. This rebasing generally resulted in downward revisions to the price indices, so that when they are used for deflation, the result is upwardrevisions to the constant price value series.

• This result appears counter-intuitive: we might expect all rebasing activities to reduce the substitution bias in growth estimates and thus lead to downward revisions to growth. In fact we see the opposite effect because the price indices used as deflators are of the Laspeyres form whereas they should, in theory, be of the Paasche form. Rebasing a Paasche price index generally causes it to be revised upwards, and thus growth downwards. The SNA93 and ESA95

recognise that the use of Paasche price indices is usually impossible for practical reasons and therefore recommend deflating at a detailed level and rebasing as frequently as possible to minimise the counter-intuitive effects of using Laspeyres deflators. This effect is identical to that seen as a result of the five-yearly rebasing exercises carried out in the past.

Rebased lower-level volume series– since chain-linking is generally not performed at the lowest level for which volume series are available, these detailed series need to be aggregated before the annual chain-linking procedure can be applied. The 1995 weights previously used for this aggregation were therefore replaced by 2000 weights. This rebasing tended to have a downward effect on growth estimates. This effect is identical to that seen as a result of the five-yearly rebasing exercises carried out in the past.

Methodological improvements– the introduction of a major methodological change such as chain-linking is the obvious time to make a wide variety of more minor methodological improvements. Thus major improvements were made in the deflation of imported capital goods. The import prices survey was expanded leading to the introduction of import price indices (IPIs) for deflation, in the place

of import-adjusted PPIs. Previously, IPIs were used for only 31% of imports of goods, whereas this has now been expanded to 61%. The introduction of IPIs and annual chain-linking has caused the deflators to fall less quickly, particularly in the area of office machinery, computers and telecommunication equipment. i.e. the deflators have been revised upwards leading to downwardeffects on the growth of imports (upward effects on GDP). The weights for these commodities have also increased significantly further increasing the downward effect on growth, through the lower-level aggregation process described above.

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