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Space-time (In)consistency in the national accounts: causes and cures

Oulton, Nicholas (2015) Space-time (In)consistency in the national accounts: causes and cures. CFM discussion paper series (CFM-DP2015-24). Centre For Macroeconomics, London, UK.

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Abstract

Space-time consistency in the national accounts means that the relative size or standard of living of a country today is the same whether we measure it by an earlier PPP extrapolated to the present using relative inflation rates from the national accounts or by the current PPP. Empirically, space-time inconsistency is extensive. Theoretically, space-time consistency prevails if the consumer’s utility function (or the revenue (GDP) function) is homothetic and if Divisia price indices are used to deflate nominal consumption (or GDP), both over time and across countries. Hence the inconsistency we observe is due to either (a) non-homotheticity in consumption (or production); (b) approximation error when discrete chain indices are used instead of continuous Divisia indices; or (c) errors in domestic price indices and PPPs. Based on detailed data from the 1980 and 2005 International Comparisons Program and the Penn World Table, I conclude that errors in price indices and PPPs are the major cause of inconsistency.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2015 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E23 - Production
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I31 - General Welfare; Basic Needs; Living Standards; Quality of Life; Happiness
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 14 Dec 2017 09:55
Last Modified: 17 Jun 2019 23:22
URI: http://eprints.lse.ac.uk/id/eprint/86285

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