Revisions to Gross Domestic Product and Implications for the Comparisons

The concept of GDP is a commonly used measure of economic activity. It can be expressed in nominal dollars or, with the use of a matched price index to remove inflation, in “real” terms. Movements in nominal GDP show how the value of goods and services produced by the United States changes over time, while real GDP is a measure of how the physical production of the economy has grown. While simple in concept, the projecting of nominal and real GDP and the interpretation of these projected measures relative to “history” is not simple or straightforward. The Bureau of Economic Analysis (BEA) within the U.S. Department of Commerce continually adjusts the National Income and Product Accounts data, with comprehensive revisions completed every 4 or 5 years. The last four major revisions (1985, 1991, 1995, and 1999) incorporated definitional and statistical changes, as well as emphasizing new ways of presenting the data. Also, prior to AEO1993 aggregate economic activity was measured and projected on the basis of Gross National Product (GNP) as opposed to Gross Domestic Product (GDP). For the period from 1984 through 2004, nominal GNP is on average approximately 0.45 percent above nominal GDP.

The changes are not restricted to the nominal series. Concept changes in the derivation of real GDP also change the perception of economic activity. Prior to 1995, BEA measured real GDP on a fixed-base-year-method. Price deflators for each component of GDP were used to deflate the value of nominal GDP to a base year. While this method allowed total real GDP to be computed by adding the component values (consumption, investment, government, net exports), reliance on base-year-weighting caused problems. The perception of growth in real GDP using the fixed-weight approach is dependent on the selection of the base year. In switching the base year from 1982 to 1987, all the growth rates for the respective “real” components changed. A solution is to convert to a chain-weighted measure that eliminates the problem of historical growth rates changing when the base year is updated.³ If this approach is followed, however, the component pieces of GDP do not add to the total GDP.

Following the BEA, the AEO projections prior to AEO1997 used a fixed-weight base year GDP with several different base years. Beginning with the AEO1997 projection, the AEO projection has been completed using chain-weighted dollars. Any evaluation therefore must acknowledge that the projections were based on historical data, as it appeared at the time the projections were prepared. The problem is, there is only one set of historical values available now – the BEA series on nominal GDP and real GDP expressed in 2000 chain-weighted dollars. What should be the basis of comparison of projection differences – nominal or real?

Each AEO shows the price deflator and the real GDP series (fixed-weight or chain-weighted, depending upon AEO vintage). A simple multiplication yields the nominal GDP series. While the transformation is simple, there is the difficulty associated with gaps in the data as the BEA has included additional components in the definition of nominal GDP over time. Since the GDP projection cannot anticipate such changes, it will be incorrect from the start. On the real side, each AEO reports real GDP, but early AEOs are in fixed-weight dollars with varying base years, and since 1997 (AEO98), GDP projections use a chain-weighted method. Again, there exists only one current history – the BEA chain-weighted 2000 dollar concept. Lack of available data from old AEOs precludes moving the old fixed-weight real GDP into a chain-weighted concept. The alternative of viewing history from a fixed-weight perspective is not viable because BEA does not maintain these series in that form. And even if the conversion issues did not exist, the real GDP measure would still contain the gap in the nominal series due to definitional changes in what GDP includes.

For the above reasons, earlier AEO evaluations provided GDP comparisons in nominal dollars. However, beginning with this edition, the projection differences for GDP are developed as percentage point differences in growth rates of real GDP. This has several advantages. First, projection differences will not tend to persist over the projection horizon (as would occur if real GDP experienced and un-projected drop in an early year due to a recession – in which case subsequent year projections differences would also tend to be in the same direction and greater than actual for this example). Second, certain definitional changes may have less of an impact on the growth rate in real GDP than on the levels of GDP. And finally, the growth rate in real GDP is a more familiar concept. Table 3 clearly shows patterns of expansion and recession based on the AEO projection differences – the AEO projects long term trends in real GDP and does not model business cycles. An updated version of Table 3 in nominal dollars is provided for continuity, but the summary statistics in Tables 1 and 2 are based on the new version of Table 3.

3 “Chained-Dollar Indexes: issues, Tips on Their Use, and Upcoming Changes,” J. Steven Landefeld, Brent R. Moulton, and Cindy M. Vojtech, Survey of Current Business, Bureau of Economic Analysis, November 2003. http://www.bea.gov/bea/ARTICLES/2003/11November/1103%20Chain-dollar.pdf