Demand Shocksand Real GDP Measurement

by Emi Nakamura

Discussion by Susanto Basu

Comments on

SSHRC Conference, Vancouver, June 29, 2004

Demand & Real GDP CRIW Conference, June 29, 2004 2

The really quick summary

S

D

S’

D’

Q0

P0

1SP

1DP

Q1

Demand & Real GDP CRIW Conference, June 29, 2004 3

Index number theorist’s reaction

• This is a novel and striking result

• Also very simple—once explained!

• Explains some puzzling facts

• Demand shocks create interpretation problems for Fisher and Paasche indices

• But can attach an utility-based interpretation to Laspeyres index

Demand & Real GDP CRIW Conference, June 29, 2004 4

Macroeconomist’s reaction

• One more reason to not attach a structural interpretation to real GDP

• Are problems worse than, e.g., aggregation across consumers with differing MU’s of wealth?

• Macroeconomists will ignore measurement issues unless they matter for particular applications

• Needed: Example(s) where macroeconomists will draw wrong/misleading conclusions by using chain-weighted real GDP when there are demand shocks

Demand & Real GDP CRIW Conference, June 29, 2004 5

One example of a macro application*

• In a multi-sector economy, suppose a transitory, persistent technology improvement in, say, sector 1 raises Q1(t) by X(t)

• Now suppose instead a transitory demand shock that has the same effect on the time path of Q1(t)

• The increase in total GDP due to the technology shock will appear smaller (because P1 falls), but will also appear more persistent—since P1 is rising as the shock fades away

• By contrast, the demand shock will appear less persistent, because GDP will rise by more on impact (since P1 will rise with Q1), but then also fade away more quickly, since P1 will fall as Q1 asymptotes back to zero.

• Thus the persistence of GDP, which is of great interest to macroeconomists, depends on the type of shocks

* Inspired by a comment from Carol Corrado