Consistent aggregation and chaining of price and quantity measures

Abstract

The international movement to convert the real (deflated) components of the NIPAs to chain indexes, in order to assure timeliness, has exposed their inconsistency. Most importantly, the components do not add up to the totals. The US accounts, which employ a Fisher chain, have additional inconsistencies. For example, the product of the price and quantity indexes does not reproduce the change in nominal expenditure. The paper presents a unified approach to the construction of price and quantity measures which can be chained while maintaining every kind of consistency. The solution is based on a combination of elements from the theories of price indexes and consumer surplus and does not require the unrealistic assumption of homothetic and identical preferences usually made in the economic theory of index numbers.