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    GDP With Chain Weighted Method

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    Abdoukadirr Sambou

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    GDP With Chain Weighted Method

    Uploaded by

    Abdoukadirr Sambou
    41 views15 pages

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    GDP with Chain Weighted method

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    41 views15 pages

    GDP With Chain Weighted Method

    Uploaded by

    Abdoukadirr Sambou

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    Chain Weighted method

    GDP calculation
    What is?
    • It is a real value calculation. Does not consider base
    year. It is the calculation of output or index with
    two year prices and than taking its average of the
    growth rates.
    • Essentially, a chain-weight system differs from a
    fixed-weight system in that it measures output
    using current and previous year prices—something
    akin to a floating base year. For example,
    calculating chain-type GDP for 2020 is done using
    prices and quantities from 2019 and 2020.
    Advantage
    • The primary advantage of the chain-weight
    measure is that it allows for substitution effects
    overtime—that is, it accounts for changes in
    consumption and production patterns that
    occur from relative price changes. Another
    important advantage is that chain-type
    measures value output of final goods and
    services for any period in terms of what the
    structure of the economy was at the time.
    Difference
    • The difference between the two methods is
    that the original method only uses base year
    prices. This means that your choice of base
    year actually matters. In the chain-weighted
    method, because you are using two years
    worth of prices to calculate growth rates, the
    base year does not affect the measurement of
    inflation.
    Example
    • Suppose people only consume 3 different
    goods. The following table shows the prices
    and quantities of each good consumed in
    2006, 2007, and 2008.
    Prices and quantites for the example
    Year Price of Quantity Price of Quantity Price of Quantity
    fish $ of fish Pork $ of Pork Beef $ of Beef

    2006 7 400 8 225 10 175


    2007 8 550 7 250 12 275
    2008 9 900 6 275 15 275
    Calculate nominal GDP in each of the three
    years
    • Nominal GDP is simply equal to the sum of the
    current year price * current year quantity of
    all the goods.
    • 2006: (7*400) + (8*225) + (10*175) = 2,800 + 1,800 + 1,750 = $6,350.
    • 2007: (8*550) + (7*250) + (12*275) = 4,400 + 1,750 + 3,300 = $9,450.
    • 2008: (9*900) + (6*275) + (15*275) = 8,100 + 1,650 + 4,125 = $13,875.
    Calculate Real GDP in each of the three
    years,using 2006 as the base year.
    • Real GDP is equal to the sum of the base year
    price * current year quantity of all the goods.
    • 2006: (7*400) + (8*225) + (10*175) = 2,800 + 1,800 + 1,750 = $6,350.
    • 2007: (7*550) + (8*250) + (10*275) = 3,850 + 2,000 + 2,750 = $8,600.
    • 2008: (7*900) + (8*275) + (10*275) = 6,300 + 2,200 + 2,750 = $11,250.
    Calculate the GDP deflator for each of the
    three years.
    • The GDP deflator is equal to (Nominal GDP /
    Real GDP)*100.
    • 2006: 100. Because 2006 is the base year we
    know the deflator has to equal
    • 100 even without doing any calculations.
    • 2007: (9,450 / 8,600)*100 = 109.9.
    • 2008: (13,875 / 11,250)*100 = 123.3.
    Calculate inflation for 2007 and 2008.
    • Inflation is equal to the growth rate of the
    GDP deflator. The growth rate
    • formula is: ((Year2 – Year1)/Year1) *100.
    • 2007: ((109.9 – 100)/100)*100 = 9.9%.
    • 2008: ((123.3 – 109.9)/109.9)*100 = 12.2%.
    Calculate Real GDP for 2007 and 2008 using
    the chain-weighted method.
    • Using 2006 as the base year, we know that
    Real GDP is equal to nominal GDP. Thus Real
    GDP in 2006 is $6,350. This gives us the
    starting point for the chain-weighted method
    of calculating real GDP.
    • To calculate chain-weighted Real GDP for 2007 we need the
    following four pieces of information:
    • 2006 quantities at 2006 prices: $6,350.
    • 2007 quantities at 2006 prices: $8,600.
    • 2006 quantities at 2007 prices:
    • (8*400) + (7*225) + (12*175) = $6,875.
    • 2007 quantities at 2007 prices: $9,450.
    Now we calculate the growth rate of GDP
    with 2006 prices:
    • ((8,600 – 6,350)/6,350)*100 = 35.4%,
    • Then the growth rate of GDP using 2007
    prices:
    • ((9,450 – 6,875)/6,875)*100 = 37.5%.
    • The next step is to average the two growth
    rates: (35.4 + 37.5)/2 = 36.45%.
    • This gives us the chain weighted growth rate
    of real GDP for 2007. So to calculate 2007 Real
    GDP we multiply 2006 real GDP by this growth
    rate:
    • (6,350 + (6,350*36.45%)) = $8,664.6.
    Question?
    • What was the real GDP in 2008 with chain
    weighted method?

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