Breaking the Chain
It was claimed on Twitter that the UK’s gross domestic product per person had fallen by “nearly two-thirds” since 1979.
That claim is false, and this article examines why.
Author’s calculations
A Twitter account asserted:
UK GDP Per Person (2019 Values):
1979: £89,460
40 years of selling public assets, social housing, private outsourcing later.
2019: £31,100
The neoliberal era has robbed the UK of nearly 2/3rds of it’s ability to generate income.
These statistics were shared over 600 times — and are false. It is based on the author’s own erroneous calculations.
Since GDP figures are published with the effects of prices already removed, the account wrongly attempts to ‘adjust’ for inflation.
Readers may note the year 2019 is incomplete. It would not be possible for such calculations — even if conducted correctly — to refer to ‘2019 values’. This claim is also contrary to Office for National Statistics figures, which already publish the UK’s GDP per person (using the chain volume measures).
The country’s GDP per person has grown by over 90% since 1979.
The same trend can be seen in GDP when expressed in constant prices.
People should take much greater care to ensure they do not misrepresent official statistics.
What are chained volume measures?
Millions of economic transactions occur every day. If we wanted to compare the monetary value of all those transactions over two time periods, there are two reasons why they may differ:
- Quantities: More or less of the same goods and services are being produced and sold;
- Prices: The monetary value of those goods and services is higher or lower.
We are typically interested in whether increases in the total value of all transactions are due to increases in quantities, rather than prices.
We could keep the prices on a shared set of goods and services fixed — applying the price from one period (the base period) to all other periods. This is called the constant price estimate. This method has been widely used to remove price effects, but has some limitations:
- Substitution: Over time, people replace expensive items with cheaper ones. This substitution effect distorts the growth rate.
- Relative prices: Different items grow at different rates. The further away we are from the base period, commodity weights become out-of-date.
- Disappearances: New items appear and older ones disappear. If we seek to compare two periods far apart in time, few commodities will be shared across both time periods. Coverage and quality declines.
The chained volume measure also seek to remove price effects.
We have a starting period. We then calculate the transaction value in the first period based on prices in the starting period. We then calculate the transaction value in the second period based on prices in the first period, and so on.
By updating the base period annually, the different years are then linked (or chained) together, to produce a time series of chained volume measures.
The Australian Bureau of Statistics has sought to explain the use of chain-linking, identifying the key advantage: whilst re-referencing results in revisions to the chain volume measures across their entire history, it does not affect the growth rates.
