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The ICP approach

GDP can be estimated from the production side, the expenditure side and the income side. All three approaches will yield the same result in theory. Price and volume comparisons of GDP are based on the identity: value = price x volume. The values of income aggregates, unlike the values of production and expenditure aggregates, cannot be split into meaningful price and volume components. Price and volume comparisons can only be made from the production side or the expenditure side.

 

ICP comparisons are made from the expenditure side. These have the advantage of enabling the levels and structures of the principal components of final demand – consumption and investment – to be compared. They are also less difficult to organize because they have less onerous data requirements. Their disadvantage is that, because industries are not identified on the expenditure side, productivity comparisons can be made only at the level of the whole economy. To compare productivity at the industry level, international comparisons should be made from the production side. These are more difficult to organize as they require data for both intermediate consumption and gross output.

 

Comparing the values of the final expenditure that countries make on GDP will not provide a comparison of the volumes of goods and services purchased in the countries unless the differences in their price levels have been removed. Differences in price levels can be removed either by observing volumes directly or by deriving them indirectly using a measure of relative prices to place the expenditures of the countries on a uniform price level. Prices are easier to observe than volumes and direct measures of relative prices usually have smaller variability than direct measures of relative volumes. ICP comparisons observe prices directly and estimate volumes indirectly.