Tuesday, November 5, 2013
The Philadelphia Fed has a post on an alternative GDP measure, called "GDP Plus." The GDP measure we pay most attention to comes from the expenditure side of the national income and product (NIPA) accounts. As we teach undergraduates, there is also an income side to the NIPA, and in a world without measurement error, we would come up with the same measure of GDP whether we do it from the income side or the expenditure side. However, we live in a world with measurement error, and NIPA reports different estimates of GDP coming from the expenditure approach and income approach to measuring GDP. A paper by Aruoba et al. shows how to use information from the expenditure and income measures of GDP from the NIPA to construct an estimate of GDP which is in principle superior to the expenditure side estimate. The authors use latent variable methods. In the Philadelphia Fed post, you can see that this approach can make a substantial difference for quarterly growth rates of GDP. A key question is whether the alternative measure makes a difference for the cyclical properties of real GDP. Not sure if this is reported in the Aruoba et al. paper, as I haven't read it. Unfortunately the Philly Fed post just gives us a time series of quarterly growth rates - not the levels.