Question
For inflation-adjusted data (particularly GDP), what is the difference between "constant prices" and "chained prices"?
Answer
To perform inflation adjustment, the constant-price method was the first to be adopted. It is computationally simple, and preserves additivity between a total and its components. However, it induces distortions far from the currency reference year because of inevitable changes in consumption patterns (viz., changes in price relativities and changes in quality). To mitigate this, statisticians can periodically advance the base period and adjust component weights.
The chained method is more computationally involved, and is recommended by the UN SNA 1993 and 2008 national accounts conceptual frameworks. It better accounts for substitution effects (i.e., a change in the relative prices and types of goods and services, notably with the price/performance of information technology). However, it has the drawback that a total and its components are not additive, because they are adjusted separately.
Terminology varies between statistical agencies.
Synonyms
- in current dollars, at current prices, nominal, price
- inflation-adjusted, adjusted for price changes, real, quantity, volume
- constant, fixed-weight
- chained, chain-weight, chain-linked, chain-type, chained volume measure, CVM
- convert from current to constant prices, deflate
- currency reference year, reference base year, base year
Note that the term "real" means "adjusted for price differences" which can refer either to time (inflation, as in the GDP of a single country) or to space (PPP measures, when comparing countries).
Data Buffet unit-descriptor metadata
- (Ths. CAD) is read as "thousands of current Canadian dollars"
- (Mil. 2009 KES) is "millions of constant year-2009 Kenyan shillings"
- (Mil. Ch. 2012 USD) is "millions of chained year-2012 U.S. dollars"
References
See also