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National Accounts Articles - Impact of National Accounts improvements on headline GDP growth (chained volume measure)

Released: 30 June 2014 Download PDF

Introduction

On 16 May 2014, the Office for National Statistics (ONS) published an article, Latest Developments to National Accounts, detailing the improvements to National Accounts which will be made in September 2014 to ensure that the UK National Accounts continue to provide the best possible framework for analysing the UK economy and comparing it with those of other countries. That article also indicated that ONS would publish a series of articles setting out methodological details of the changes, topic by topic, and an indication of the impact of these changes.

The main categories of improvements to be implemented in Blue Book 2014 are:

  1. Changes required under new International standards and guidelines: European System of Accounts 2010 (ESA 2010); Balance of Payments Manual 6 (BPM6)1; the updated Manual on Government Deficit and Debt (MGDD)

  2. Changes from ensuring comparability in measuring Gross National Income (GNI) across EU countries

  3. Other changes to meet user needs, including implementing the Review of public sector finances (PSF) and alignment of National Accounts with PSF; improved methods for Inventories and Gross Fixed Capital Formation (GFCF); updating base year and reference year from 2010 to 2011; Producer Price Index (PPI) and Services Producer Price Index (SPPI) re-basing from 2005 to 2010.

On 29 May 2014 and 10 June 2014, articles were published that described the changes that had an impact on Gross Domestic Product (GDP) in current prices. The latest set of articles give details of how these changes impact on the headline or real measure of GDP (the ‘chained volume measure’), for the period 1998 to 2009. Also, on 30 June 2014, ONS is publishing articles describing some further changes that only impact on headline GDP.

Notes

1. For the remainder of this article the term ‘ESA 2010’ will be used to cover BPM6 changes as well.

Summary

Average annual growth in real GDP over the period 1998 to 2009 is currently published at 2.2%. It is anticipated that this will be unrevised following the changes being made in September 2014. However, despite there being no systematic upward or downward revisions to annual growth over the period, there are some large revisions in both directions to individual years, ranging from -1.0 percentage points (pp) in 2007 to +1.1 pp in 2009. The detail of how each year is affected is shown in Annex A (28.5 Kb Excel sheet) .

Figures for 2010 and more recent years are not yet available. These will not be processed until closer to the time of publication in order to take account of the most recent available data in the usual manner. All figures will also be adjusted as a result of the change of base and reference years from 2010 to 2011. This impact article therefore focuses on the revisions to growth for the period 1998 to 2009 which will not be affected by rebasing, rather than describing changes to the levels of real GDP which will change when the reference year is advanced by one year.

Latest estimates of the impact on key aggregates

The latest estimates of the impact of the planned changes are shown in Table 1.

Table 1: Latest estimates of the impact of the planned changes on selected key aggregates

Indicator Impact
REAL MEASURE OF GDP  
Provisional estimate of the impact on growth in annual real GDP (chained volume measure) Average revision to real GDP growth 1998 to 2009 is 0.0 percentage points. For individual years, see Annex A.
   
GDP IN CURRENT PRICES  
Provisional estimate of the impact of all changes to the level of GDP in current prices Average revision to level of GDP 1997 to 2009 is +3.6%.  For individual years, see Annex B. 
   
Of which:  
Due to ESA 2010 Average revision 1997 to 2009 is +2.0%. For individual years, see Annex B. 
Not related to ESA 2010  Average revision 1997 to 2009 is +1.6%. For individual years, see Annex B.

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Impact on real GDP

The headline measure of GDP relates to the growth between two periods of ‘real GDP’ (or ‘chained volume measure’), that is, with the effect of inflation removed. The impact of the changes being made in September 2014 on estimates of annual growth in real GDP is shown in Annex A (28.5 Kb Excel sheet) . The impact of the changes to the level of GDP in current prices, that is without the effect of inflation removed, is shown in Annex B (31 Kb Excel sheet) .

There are two main reasons why revisions to growth in the current price estimates do not lead to similar revisions to the growth in real GDP:

  • Some of the new methodologies being introduced in Blue Book 2014 relate to how the current price estimates are deflated and/or chain linked

  • The new concepts being introduced in Blue Book 2014 will be deflated using the most appropriate deflator for the activity. This may impact on the overall GDP deflator and hence the relationship between current price GDP and real GDP.

Revisions to real GDP annual growth

Annex C shows, for each year from 1998 to 2009, estimates of the annual change in real GDP (chained volume measure) as published in each Blue Book from 2000 alongside the near-final estimate that will be published in September 2014.

The figures are of course not strictly comparable as Blue Book 2014 sees the introduction of a new definition of GDP (ESA 2010). However, compared to the estimates published in Blue Book 2013, the average revision is 0.0 pp. The years 1999, 2001 and 2009 have been revised up by 0.5 pp or more and 2000, 2004 and 2007 revised down by 0.5 pp or more.

1997 to 2009 covers a period of relatively stable growth up to 2007 followed by the economic downturn in 2008 and 2009. The provisional estimates to be released in September show that average annual growth between 1997 and 2007 is 3.2%, the same as in Blue Books 2012 and 2013 but as indicated above, individual years have been revised. For the period of the economic downturn (2008 and 2009), the estimates of annual growth (2008 growth: -1.1% and 2009 growth: -4.1%) are very similar to those published in Blue Book 2012 (2008 growth: -1.0% and 2009 growth: -4.0%). In Blue Book 2013, the economic downturn was thought to have deepened, largely because of a reassessment of the profile of profits data received from HMRC. The latest methodological changes have offset that reassessment.

Chart 1 shows the figures in Annex C (28.5 Kb Excel sheet) in graphical form. The grey lines represent annual real GDP growth rates for each Blue Book from 2000 to 2012.

Annual GDP growth rates (chained volume measure) in various Blue Books

Annual GDP growth rates (chained volume measure) in various Blue Books

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What is being released on 30 June 2014?

ONS is publishing the final set of methodological articles describing changes being made in September 2014 that have an impact on real GDP growths.

In detail the articles are:

The estimates of the impact on real GDP growths included in this article are as a result of all of the methodological changes published to date, including those that impact on the level of GDP in current prices that were published on 29 May 2014 and 10 June 2014.

Individual impacts of changes

1. Review of Non-Profit Institutions Serving Households (NPISH)

A detailed review of sources and methods has been completed covering the NPISH sector. This has the impact of raising the level of GDP in current prices in the years 1997 to 2009 by between £1.4 billion and £23.6 billion.

The new sources and methods also change the estimate of real GDP growth in particular years over the period by between -0.2 pp and +0.4 pp. The impact on average annual real GDP growth is +0.1 pp.

Further information can be found in the  Review of the Non-Profit Institutions Serving Household Sector article (109.6 Kb Pdf) published on 29 May 2014.

2. Illegal activities - drugs and prostitution

The inclusion of illegal drugs and prostitution in the measurement of GDP is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £7.7 billion and £10.5 billion.

The new sources and methods also change the estimate of real GDP growth in particular years over the period by between -0.2 pp and +0.1 pp. There is no impact on average annual real GDP growth.

A detailed description of the new sources and methods was published on 29 May 2014 in the Inclusion of Illegal Drugs and Prostitution in the UK National Accounts article (251.9 Kb Pdf) .

3. ‘Own-Account Construction’ + Exhaustiveness

Own-Account Construction

Own-account construction refers to the production of new dwellings and major repairs and improvements by enterprises and households for their own use. In the National Accounts, these are classified as GFCF.

For output of own-account construction by private corporations, the calculation should include a ‘mark up’ in the valuation of the asset produced. The current method is based on calculating the value of the asset produced using the sum of costs.

The impact of the new methods is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £0.9 billion and £4.2 billion.

A detailed description of the new sources and methods was published on 29 May 2014 in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article (105.1 Kb Pdf) .

Exhaustiveness

Measuring the Non-Observed Economy: A Handbook (OECD, 2002) notes that ‘GDP estimates are said to be exhaustive when they include all production activities within the System of National Accounts production boundary’. A review of the methods to ensure exhaustiveness in the UK National Accounts has been carried out including examination of the existing adjustments. The new methods lead to lower household final consumption expenditure on gambling and digital TV offset in the later years by increased expenditure on fuel.

The impact of the new methods is provisionally estimated to lower the level of GDP in current prices in the years 1997 to 2009 by between £1.0 billion and £0.1 billion.

A detailed description of the new sources and methods was published on 29 May 2014 in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article (105.1 Kb Pdf) .

At present it is not possible to separate the impact on real GDP of these two changes. Work is continuing with the aim of being able to provide more detail alongside the publication of the Quarterly National Accounts in September 2014. The new sources and methods for own-account construction and exhaustiveness combined change the estimate of real GDP growth in particular years over the period by between -0.1 pp and +0.2 pp. There is no impact on average annual real GDP growth.

4. GFCF Methods Improvements

There are two key improvements that have been made to the methods for calculating GFCF that are not related to the introduction of ESA 2010. These are described in more detail in the Gross Fixed Capital Formation and Business Investment – Impact of ESA 2010 changes on Volume Measures article published on 30 June 2014.

The impact of the new methods is provisionally estimated to change the level of GDP in current prices in the years 1997 to 2009 by between -£9.5 billion and +£5.8 billion.

The new sources and methods also change the estimate of real GDP growth in particular years over the period by between -0.8 pp and +0.2 pp. The impact on average annual real GDP growth is -0.1 pp.

A detailed description of the new sources and methods was published on 29 May 2014 in the  Gross fixed capital formation (investment) – changes for Blue Book 2014 (excluding ESA10) article (157.8 Kb Pdf) .

5. Change in Inventories Methods Improvements

The revision to changes in inventories is as a result of introducing improved methodologies to meet user needs. This change for Blue Book 2014 was announced in the article GDP Continuous Improvement: summary of improvements to the estimation of changes in inventories in the UK National Accounts (200.8 Kb Pdf) , published in March 2013. More detail was given in Changes in Inventories – Impact of Blue Book 2014 changes on Volume Measures article published on 30 June 2014
The impact of the new methods is provisionally estimated to change the level of GDP in current prices in the years 1997 to 2009 by between -£4.3 billion and +£2.4 billion.

The new sources and methods also change the estimate of real GDP growth in particular years over the period by between -0.5 pp and +0.8 pp. There is no impact on average annual real GDP growth.

6. Pensions

The new treatment of funded defined benefit pension schemes in the National Accounts was described in Developments to the Treatment of Pensions in the National Accounts article published on 28 April 2014.
The impact of the new methods is provisionally estimated to change the level of GDP in current prices in the years 1997 to 2009 by between -£1.3 billion and +£6.8 billion.

The new sources and methods also change the estimate of real GDP growth in particular years over the period by between -0.3 pp and +0.3 pp. The impact on average annual real GDP growth is +0.1 pp.

7. Household Expenditure on New Cars

Around 2.5% of household final consumption expenditure is accounted for by the purchase of new cars. The current method uses list prices to estimate expenditure from the number of new registrations. The new method takes account of discounts that are negotiated and accessories that are included at the point of sale. Information on ‘target price’ (i.e. the price that purchasers should hope to pay) published in the magazine ‘What Car?’ is used as the basis for the price paid with an estimate also made for any extras purchased at the point of sale.

A detailed description of the new sources and methods was published on 29 May 2014 in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article (105.1 Kb Pdf) .

The impact of the new methods is provisionally estimated to lower the level of GDP in current prices in the years 1997 to 2009 by between £0.2 billion and £0.5 billion.

There is no impact on GDP growth in any year from 1997 to 2009 arising from the new methodology for calculating household expenditure on new cars.

8. Rebasing of Producer Price and Services Producer Price Indices

Every five years, Producer Price and Services Producer Price Indices (PPI and SPPI) are rebased to take account of more up to date weights. Since Blue Book 2013 PPI and SPPI have been rebased to reflect 2010 weights and prices. The Impact on National Accounts of Producer Price Index Rebasing article published on 30 June 2014 describes how this affects the National Accounts.

The rebased deflators only have any impact from 2008 quarter four onwards. The impact on real GDP growth in 2008 is insignificant and in 2009 the provisional impact is to increase annual real GDP growth by 0.1 pp.

9. Other Changes

This section presents the impacts of the changes below in current prices only as at present it is not possible to separate the impact on real GDP of each of these changes individually. Work is continuing with the aim of being able to provide more detail alongside the publication of the Quarterly National Accounts in September 2014. The new sources and methods for these changes combined affect the estimate of real GDP growth in particular years over the period by between -0.4 pp and +0.4 pp. The impact on average annual real GDP growth is -0.1pp.

The description of the methods changes and their impact on the level of GDP in current prices is given in each section below.

Research and Development (R&D)

Two articles on the new treatment and measurement of R&D under ESA 2010 and the new framework for measuring R&D in the National Accounts were published on 10 June 2014.

The impact of the new methods is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £12.6 billion and £23.2 billion.

Weapons

The new treatment of expenditure on weapons systems as specified under ESA 2010 is described in the Transition to ESA 2010: Capitalising Government Spending on Military Weapons article published on 10 June 2014.

The impact of the new methods is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £2.0 billion and £3.5 billion.

Decommissioning Costs

ESA 2010 expands on the explanation of the costs of ownership transfer to explicitly include decommissioning or terminal costs. In accordance with the previous standards (ESA 1995), costs of ownership transfer are currently treated as fixed capital formation and written off as consumption of fixed capital in the year of disposal or acquisition. As terminal costs were not separately mentioned in ESA 1995, there is currently no special treatment or source for them in the National Accounts. Decommissioning is carried out in a number of industries covering many assets but, in Blue Book 2014, it is assumed that the majority of decommissioning costs relate to oil and gas or nuclear infrastructure. Adding decommissioning costs to transfer costs will result in higher levels of GFCF and consumption of fixed capital.

The impact of the new methods is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £0.0 billion and +£1.0 billion.

Financial Intermediation Services Indirectly Measured (FISIM)

ONS fully implemented the concept of FISIM into the UK National Accounts in Blue Book 2008. More recently ONS, in collaboration with the Bank of England, have reviewed the FISIM methodology that was introduced.

A detailed description of the new sources and methods was published on 29 May 2014 in the Financial Intermediation Services Indirectly Measured (FISIM) article (85.8 Kb Pdf) .

The impact of the new methods is provisionally estimated to change the level of GDP in current prices in the years 1997 to 2009 by between -£0.7 billion and +£5.7 billion.

Small Tools

ESA 1995 set a lower bound of 500 euros at 1995 prices for small tools to be recognised as capital expenditure. Purchase of items below this threshold is classified as intermediate consumption. In ESA 2010 no fixed threshold is given. The criteria used for expenditure to be recognized as capital expenditure is the use in production for more than one year. In practice, items such as ‘[Expenditure on] inexpensive tools used for common operations, such as saws, spades, knives, axes, hammers, screwdrivers, wrenches and other hand tools; small devices such as pocket calculators. . . . is recorded as intermediate consumption.’
The impact of the new methods is provisionally estimated to raise the level of GDP in current prices in the years 1997 to 2009 by between £0.2 billion and £0.4 billion.

Output Industry Reviews Blue Book 2014 implementation

As part of the continuous improvement programme for the output approach to measuring GDP (GDPO) three industry reviews are being implemented in Blue Book 2014. These relate to real estate (division 68), public administration (division 84) and health (division 86). Full details of each review will be released at the same time as the publication of quarterly national accounts consistent with Blue Book 2014 in September 2014. Further details are provided in the Industry Reviews BB14 Implementation article which was published on 30 June 2014.

The impact of the output industry reviews is not significant enough to change the level of real GDP growth (to 1 decimal place) in any of the years from 1997 to 2009.

Plans for future updates

The Latest developments to National Accounts article published on 16 May 2014 informed users that ONS planned to give information about the methods used and the likely scale of the impact on the key economic aggregates at the earliest opportunity. Users were promised this information well before publication of the full set of accounts in September 2014. So far users have been informed of the impact of the planned changes on annual GDP levels in current prices for each year 1997 to 2009 (10 June) and the impact of the changes on headline real GDP annual growths (30 June).

Future scheduled release dates are shown in Table 2.

Table 2: Release dates for future articles

Release date Topic
  Summary of detailed methods changes that affect the sector accounts 
  Methodological changes to the measurement of the balance of payments as a result of the introduction of BPM6
9 July 2014 Changes to the presentation of tables within Blue Book 2014, Pink Book 2014 and the UK Economic Accounts as a result of implementing ESA 2010 and BPM6 (3 articles)
  International comparisons of impact on Gross Domestic Product
  Update to transaction, asset and institutional sector classifications under ESA 2010 (3 articles)
   
23 July 2014 (prov) Impact of changes on components of GDP for years 1997 to 2009
   
  Detailed assessment of changes to Sector and Financial Accounts and Balance of Payments
12 August 2014 Impact of changes on the Household Saving Ratio
  Changes to the treatment of Pensions in the National Accounts
   
Mid/end August 2014 Impact of changes on real and nominal GDP 2010 to 2012
   
Early September Reminder of the upcoming changes 1997 to 2012 
   
30 September 2014 Publication of quarterly National Accounts data consistent with Blue Book and Pink Book 2014
   
31 October 2014 Publication of Blue Book and Pink Book 2014

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Background notes

  1. A list of those given pre-publication access to the contents of this article is published as part of this release.
  2. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

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