GDP price measures

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Released
6/09/2023
Source
Australian National Accounts: National Income, Expenditure and Product, June 2023

Introduction

This article explains price measurement in the Australian National Accounts (ANA) and provides examples of different price indexes in the ANA. A case study looking at differences between ANA prices and the Consumer Price Index (CPI) is also provided. 

Gross domestic product (GDP) is a measure of the total economic activity of an economy. Australian GDP estimates are available in current price and chain volume measures. Current price GDP measures the monetary value of economic activity. In a particular period, the total value of all transactions in an economy is equal to the sum of the individual transaction values in that period. When comparing current price estimates between time periods, the difference consists of both changes in volume and changes in price. Chain volume measures (CVMs) remove the price change effect to show the volume of activity in the economy.

The ANA publishes two measures of prices within the quarterly publication: chain price indexes and implicit price deflators (IPDs). Both price indexes are available at the component level for the expenditure measure of GDP (except for inventories).[1] The price indexes can differ when there are large changes in expenditure shares as a proportion of GDP, as shown in Figure 1. Between 2008 – 2011 the Global Financial Crisis and subsequent global recovery drove fluctuations in the share of export expenditure, due to volatility in coal, iron ore and oil prices (see (a) on Figure 1) This led to larger movements in the chain price index than the IPD. From 2020 the COVID-19 pandemic drove large changes in expenditure shares of GDP as lockdowns, restrictions, and border closures decreased the expenditure share of household final consumption expenditure (HFCE) as a proportion of GDP (see (b) on Figure 1).[2] The Russian invasion of Ukraine also contributed to price rises for liquefied natural gas (LNG), coal, and oil, which increased the expenditure share of total international trade as a proportion of GDP.

Source: The GDP chain price index in original terms is obtained from Table 4 in the Australian National Accounts quarterly publication whilst the GDP IPD in original terms was compiled from current price value obtained from Table 3 which is divided by the chain volume measure obtained from Table 2.

GDP price index calculation

There are two different types of price measures in the ANA – Chain price indexes, and Implicit price deflators (IPDs).

Chain price indexes

Chain price indexes are constructed by combining price indexes for different products using expenditure weights. Expenditure weights are derived by using each component’s proportion of the expenditure measure of current price GDP for annual base periods.[3] The price indexes are then linked (or chained) across base periods as a Laspeyres index to form a continuous time series. The reference period refers to the period indexed to 100.0 (currently 2020-21).[4] The reference period is also the last base year in chain linking. For technical information on the chaining process, refer to Price index theory.

Implicit price deflators

An IPD is an index formed by dividing the current price estimate by its corresponding chain volume estimate. IPDs combine the price movements of various products using their current price expenditure weight up to the most recent period, currently the June quarter 2023.[5] The expenditure weights are updated each period, therefore IPDs are a measure of both price and expenditure weight changes (also known as compositional change).[6] The current reference period is 2020-21.[7]

Expenditure weights

Both measures of price indexes use the same product level price indexes. What differs are the expenditure weights used, and the frequency of updating the weights, as outlined above.

For the current quarter, the expenditure weights of the GDP IPD (currently based on June quarter 2023) compared to the GDP chain price index (currently based on the 2020-21 base period) broadly align for domestic final demand (DFD) (see Figure 2).[8] There are notable differences in the expenditure weights for exports and imports between the GDP IPD and the GDP chain price index. This was driven by the large increase in energy prices since 2020-21, as prices for LNG, coal, and oil all rose strongly. The expenditure shares of imports and exports for the GDP IPD are greater than the expenditure shares in the base period of the GDP chain price index when energy commodity prices were lower.

  1. Shown as a percentage of overall current price GDP.
  2. Expenditure weights are indicative only, more information in Australian System of National Accounts: Concepts, Sources and Methods, Chapter 6 Price and volume measures.

Case study: impact of international trade on the GDP IPD

The terms of trade can have a significant impact on the GDP IPD.[9] The larger the contribution of total international trade to GDP, the larger the effect of the terms of trade on the overall GDP IPD.

The Australian economy changed considerably after the early 1970s, with progress towards various forms of trade liberalisation and broader economic deregulation. Both factors played a role in increasing Australia’s trade flows with the rest of the world.[10] As seen in Figure 3, the proportion of international trade to GDP has increased since the 1960s, driven predominately by the increased share of exports to GDP.[11]

  1. Total international trade as defined by exports (current price value) + imports (current price value).
  2. Yearly averages used.

The GDP IPD has become increasingly sensitive to terms of trade shocks over the last 50 years as a result of the strong growth in Australia’s total international trade relative to current price GDP.

The GDP IPD fell 1.5% in the June quarter 2023, which was the largest drop in the GDP IPD since the June quarter 2009 (see Figure 4). The fall was driven by the 7.9% fall in the terms of trade, despite a 1.2% rise in the DFD IPD.

The largest driver of the fall in the GDP IPD was the 8.2% fall in the exports IPD. This was driven by declines in the prices of liquefied natural gas (LNG) and coal. Natural gas stores in Europe remained unseasonably high due to a warmer than usual northern hemisphere winter. This in turn reduced global demand for thermal coal and LNG, which resulted in strong price falls.

In through-the-year (TTY) terms, the DFD IPD increased 5.8% and remained close to 30-year highs (see Figure 5). This TTY strength was driven by the large increase in the HFCE IPD which rose 6.1% TTY and the GFCF IPD which rose 6.6% TTY. Both IPDs were driven in part by strong price rises in goods imports. Capital goods imports prices were up 9.1% TTY while consumption goods imports prices were up 4.9% TTY.

Case study: difference in household prices in the June quarter 2023

The Consumer Price Index (CPI) and the Household Final Consumption Expenditure (HFCE) IPD are both measures of consumer prices. The CPI measures the price of a fixed basket of goods and services, and therefore changes in the CPI capture only price changes. Changes in the CPI provide the principal measure of household inflation. The change in the HFCE IPD is not purely a measure of price change as it does not measure a constant basket of goods. IPDs include a combination of changes in both prices and the composition of household expenditure.

There are also numerous conceptual, scope and coverage differences between the two series, including:

  • HFCE includes expenditure by all Australian resident households (in Australia and overseas) and private non-profit institutions serving households. CPI includes expenditure by all Australian resident households in the capital cities of the eight Australian states and territories.
  • There are categories of expenditure included in HFCE that are not in scope of the CPI. These include gambling expenditure, indirect finance and insurance services, and imputed rental of owner-occupied dwellings. For more information on imputed rent, refer to Household final consumption expenditure.
  • There are categories which are excluded from HFCE but are included in the CPI. An example is purchases of new dwellings by owner occupiers, which are recorded as gross fixed capital formation (GFCF) in the National Accounts.
  • Difference in treatment of a variety of Commonwealth and state government household assistance packages. For example, electricity rebates during the COVID-19 pandemic were classified as social transfers in kind in ANA (therefore did not reduce the electricity price that households paid), whereas they were included in the CPI (and so did contribute to a reduction in electricity prices paid by the consumer).[12]

For further information on differences, refer to Understanding the differences in price measures.

The HFCE IPD rose 1.2% in the June quarter 2023, as shown in Figure 6, driven by the largest quarterly rise in the rent and other dwelling services IPD in over 34 years. Prices rose for food products such as breads, fruits, and vegetables. International airfares also rose but were partly offset by a fall in fuel prices.

The main difference in growth rates in the June quarter 2023 between the HFCE IPD (1.2%) and CPI (0.9%) was the higher expenditure share of rent in HFCE. CPI and HFCE both include actual rents, but HFCE also includes imputed rents for owner occupiers, which is excluded from CPI. Rents rose strongly in HFCE (+2.4%) and CPI (+2.5%) this quarter, however due to the larger expenditure share in HFCE, rents made a larger contribution to the overall HFCE IPD than to the CPI. More information on rents in the ANA is available in Housing cost measures in the National Accounts.

Footnotes

[1] The chain price index is obtained from the Australian National Accounts: National Income, Expenditure and Product; Data downloads; Table 4 (Original terms). The implicit price deflator is obtained from Table 5 (Seasonally adjusted terms). The GDP IPD is an index obtained by dividing a current price value by its corresponding volume estimate.

[2] The fall in the expenditure share of HFCE relative to GDP in COVID-19 is available in more detail in Australian National Accounts: National Income, Expenditure and Product, June 2020.

[3] Australian System of National Accounts, 2021-22 financial year, Table 2, current price values.

[4] The reference period, where the index =100.0 is different to the base period, where expenditure weights are calculated. They can share the same time period, as occurs with the GDP chain price index. The quarterly index will average 100 across the four quarters of the reference year i.e. currently SQ20-JQ21.

[5] Current weighted price indexes are also known as Paasche price indexes. More information is available: Price index theory.

[6] Further detail available: National Accounts and Balance of Payments – Derived Measures.

[7] IPDs are current weighted indexes therefore the reference period doesn’t equal the base period, as explored in: Lao WS-Use of price indices in NA-rebasing-linking.doc (un.org). The quarterly index will average 100 across the four quarters of the reference period i.e. currently SQ20-JQ21.

[8] Domestic final demand = Government final consumption expenditure (GFCE) + Household final consumption expenditure (HFCE) + Gross fixed capital formation (GFCF).

[9] Terms of trade refers to the ratio of the export IPD to the import IPD. For more information, see Balance of Payments and International Investment Position, Australia methodology, March 2023.

[10] Additional information on “Australia’s Trade Liberalisation and analysis of its economic impacts” is available in a report provided by The Centre of International Economics for the Australian Department of Foreign Affairs and Trade.

[11] National Accounts data has been disaggregated from 1960 onwards. Trends in international trade to GDP prior to this have not been explored.

[12] For further detail, see Economic measurement during COVID-19: Selected issues in the Economic Accounts, May 2020.