SNA: GDP at Constant Prices from the Production Approach

GDP at current prices is equal to the sum of value added (at basic prices) over industries plus net taxes on products. Similarly, GDP at constant prices can be derived as the sum over value added in constant prices plus net taxes at constant prices if the Laspeyres index form underlies the constant price estimates, i.e., if Paasche price indices are used to deflate the current price values.

Value added is a non-observable variable, a balancing item (output minus intermediate consumption), and can not be decomposed into a price and a volume component directly. However, a concept of value added at constant prices can be defined and measured as output, or production, at constant prices minus intermediate consumption at constant prices.

where O is output and IC is intermediate consumption.

The basics in this example are taken from the United Nations Manual on National Accounts at Constant Prices, Statistical Papers, Series M, No. 64, New York, 1979.)

In theory the technique of double deflation is the only way to derive constant price estimates of value added. However, in practice the data required for constant price estimates of both output and intermediate consumption may not be available, so simplified approximation methods are often used. Such methods might be single extrapolation or single deflation.

Single deflation is carried out by deflating value added at current prices directly by a price index for gross output, e.g., to deflate value added in industries by the producer price index (PPI) for industries (PPI measures the price-changes of the output of industries).

Another method is to extrapolate value added in the base year by a volume index for output. The volume index used can be calculated either directly from quantity data or by deflating the current value of output by an appropriate price index.

A third option, in the case where deriving value added at constant prices by double deflation is not possible, is to estimate value added at constant prices on the basis of the movements in the volume changes of the inputs into the industries. The inputs may be total inputs (weighted average of labour and intermediate inputs), labor-inputs or intermediate consumption. This technique is mainly used to deflate value added in service industries such as finance, and in non-market service industries such as education, health and defense services provided by government sector. Estimating value added at constant prices by extrapolating using employment as a volume-indicator may be the best alternative when double deflation is not possible.

Traders provide distributive services, treated as separate production in the national accounts. The value of these services are not directly observable, since the buyer pays for the service through the sales margin incorporated in the purchaser price. The current price value of this service is the difference between the current producer price and the current purchaser price (less any sales taxes or value added taxes on products). Similarly, constant price estimates of the trade margin can be derived as the difference between constant price estimates at producers prices and the constant price estimates at purchaser prices. In practice constant price estimates of the trade margin are estimated by assuming constant quality on the distributive service, and then either (i) apply the base year’ trade margins rate on the relevant flows at constant prices, or (ii) extrapolate the base year trade margin with a volume index for trade turnover.

Taxes and subsidies have no obvious price and quantity components. Nevertheless, a concept of taxes less subsidies at constant prices can be defined as the base year tax (subsidies) rate on the product multiplied by the value of the product at constant price.

Taxes on products at constant prices in general can not be derived by deflation, so it has to be estimated either by applying the implicit base year tax rate on the transactions measured at constant prices, or by extrapolating with volume indices for the relevant transactions. (In the case of an ad valorem tax and no changes in the tax rate, taxes on products at constant prices can be estimated by deflating the value of taxes levied by the basic value price index for the product.)