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WHEN BEA releases the results of its upcoming comprehensive, or benchmark, revision of the national income and product accounts (NIPA's) at the end of this year, the featured measures of real output and prices will be calculated using chain-type annual-weighted indexes. At present, the featured measures are calculated using fixed-weighted indexes, which are usually updated at the time of a comprehensive revision. The change in the featured measures recognizes the need in estimating real GDP and prices to use weights that are appropriate for the specific periods being measured.
Changes in the new featured measures of output and prices will be calculated using the weights of adjacent years. These annual changes are "chained" (multiplied) together to form a time series that allows for the effects of changes in relative prices and changes in the composition of output over time. In contrast, fixed-weighted measures are calculated with a single set of weights over the entire time period. Use of fixed-weighted measures of real GDP and prices for periods other than those dose to the base period results in a "substitution bias" that causes an overstatement of growth for periods after the base year and an understatement of growth for periods before the base year. For example, in the currently featured fixed-weighted measure of real GDP, which is based on 1987 prices:
* Real GDP growth is overstated by 0.7 percentage point in the second quarter of 1995: Growth was 0.5 percent according to the fixed-1987-weighted measure, compared with a decline of 0.2 percent according to BEA's alternative chain-type measure, which provides unbiased estimates of growth.
* During the current expansion, average annual real GDP growth is overstated by 0.5 percentage point; in past expansions, it is understated by about 0.5 percentage point.
BEA's new featured measures will eliminate the inconvenience and confusion associated with BEA's past practice of updating the weight and base periods--and thus rewriting economic history--about every 5 years. By minimizing substitution bias, the new measures of real GDP growth will also improve analyses of issues such as productivity, returns to investment, and the long-term growth potential for the economy. For example, projections of long-term economic growth based on the new measures will avoid the consistent overestimation of output inherent in forecasts based on...