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

Nicholas Oulton

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: PPP; Divisia; Konüs; price index; path-dependence; consistency (search for similar items in EconPapers)
JEL-codes: C43 E01 E23 I31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-10
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http://eprints.lse.ac.uk/86285/ Open access version. (application/pdf)

Related works:
Working Paper: Space-Time (In)Consistency in the National Accounts: Causes and Cures (2015)
Working Paper: Space-Time (In)Consistency in the National Accounts: Causes and Cures (2015)
Working Paper: Space-time (in)consistency in the national accounts:causes and cures (2015)
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