Chain-Weighted Gdp Worked Exampl

Chain-Weighted GDP Worked Example (corrected version of pg. 35 in text) One problem with traditional “real GDP” calculations is that, since it values all goods at base year prices, it looks like prices never change. As time goes on, goods whose prices go down (and quantities usually go up) are still weighted by the old prices, and consequently get too much weight in later years’ GDP calculations. The goods don’t require a large expenditure share, but if they are valued at base year prices, it would look like a speciously high share of GDP. Let’s do the example:
YEAR 1 2 3 4 EXPENDITURE Computers Trucks 100 105 103 99 106 98 104 100 PRICE Computers $1.00 $.80 $.60 $.40

Trucks
$1.00 $1.05 $1.10 $1.15

QUANTITY (real) Computers Trucks 100.0 131.3 171.7 247.5 106.0 93.3 94.5 87.0

Notice that since Expenditure = Price*Quantity, real quantities are just Expenditure/Price. Often you start with quantities and prices and then derive expenditures; but you can’t do that with computers like you can with oranges, because although an orange in 1981 is the same as an orange in 2005, a computer is not – it’s harder to count up “quantity” in two different years. So, to get an idea of “quantity”, the best thing is to look at total expenditure and divide it by the price level. It’s simple to calculate real investment (a component of real GDP) in year 1, the base year:
Yr. 1 Real Investment = (100 computers)*($1) + (106 trucks)*($1) = $206

Now, usual calculation of real investment in year 2 would take year 2 quantities and value them at base year prices:
Yr. 2 Real Investment = (131.3 computers)*($1) + (93.3 trucks)*($1) = $224.60

Similarly, for years 3 and 4:
Yr. 3 Real Investment = (171.7 computers)*($1) + (94.5 trucks)*($1) = $266.20 Yr. 4 Real Investment = (247.5 computers)*($1) + (87.0 trucks)*($1) = $334.50

Look at what happened – computers represent 74% of real investment in year 4. However, this is unreasonably high since they represent less than half of