IFDP Paper: What is Measured in National Accounts?

Federal Reserve News for Investors and Traders

May 2023

Francois de Soyres, Alexandre Gaillard, and Henry Young


Most statistical agencies construct sectoral real GDP using double deflation and base period prices. When the base period price used for intermediate inputs is not equal to their marginal revenue product, such as when firms apply a markup, real GDP fluctuations become mechanically linked to variations in intermediate inputs. This is because these inputs generate profits that are incorporated into real value added. Taking this channel into account, we demonstrate that real GDP reported in national accounts substantially diverges from a theory-consistent "physical" value added. This, in turn, has implications for the measurement of productivity. Between 1999 and 2021, "physical" productivity cumulative growth in the Finance sector was 15pp lower compared to the Solow Residual, while it was 15pp higher in the Manufacturing sector.

Keywords: Economic Measurement, National Accounts, Markups, Productivity

DOI: https://doi.org/10.17016/IFDP.2023.1375

PDF: Full Paper

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Last Update: May 25, 2023

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