1. Advantages and disadvantages of GDP at constant prices

A) The prime advantage of GDP at constant prices is additive. Table 1 shows that the total value of production at constant prices in Period 1 ($38) equals the aggregate of choy sum ($14) and cucumber ($24); the total value of production at constant prices in Period 2 ($54) equals the aggregate of choy sum ($18) and cucumber ($36). As the price structure of the base year is used, GDP at constant prices can be calculated by aggregating the components at constant prices. In addition, another advantage is simplicity in calculation; constant price estimates can be derived by simply dividing the current prices by a fixed-base deflator.

B) Bias exists when estimating the volume changes for periods which are distant from the base year, as indirect index is compiled using the price structure of the base year. In general, the magnitude of the bias is proportional to the distance away from the base year, the further away from the base year, the larger the bias. Table 1 shows that the real growth of the total in Period 2 (42.11%) equals the volume measures in Period 2 ($54) divided by the volume measures in Period 1 ($38) where volume measures in Period 1 and 2 are derived using the prices in the base year (Period 0), which are not directly related to the price structures in Period 1 and 2.

C) As commodities and quality changes, the set of homogenous commodities become progressively smaller and the prices of homogenous commodities change over time; the price structure of the base year becomes irrelevant and fails to convey commodities and prices in the current year. Thus, volume measures derived using the fixed-base price structure does not reflect the real world economic circumstances. In Macao, with rapid changes in the economic structure in recent years, weights of each components of GDP vary each year, GDP at constant prices become irrelevant as it gets further away from the base year.

D) As illustrated in C), constant price estimates distort year-on-year growth rates and the magnitude increases with the passage of time. To address this problem, the base year is updated around every 5 years. However, as the base year is changed, a different price structure is used for comparison, the revised real growth rates are different from the original time series. In general, years preceding the base year are revised downward while years following the base year are revised upward. Such revisions may be confusing to the users.

2. Advantages and disadvantages of chain volume measures of GDP

A) Real growth rate of chain volume measures of GDP is more accurate than that of constant price estimates, as the former reflect real changes between two adjacent years. Changes in commodities and quality get cumulatively larger over time as new commodities appear while older ones disappear and functionality of commodities improves (e.g. computers). As chain volume measures compare commodities and quality between 2 consecutive years, the substitution bias is smaller. Therefore, direct index compiled by chain volume measures is a better indicator of volume change as compared with indirect index compiled by constant price estimates. Chain volume measures overcome the disadvantage of constant price estimates mentioned in B) in the previous section. Table 2 shows that the real growth of the total in Period 2 (38.20%), which is calculated relative to the commodities and prices in Period 1, is more accurate than the real growth of constant price estimates (42.11%). The discrepancy between the 2 methods is large and gets cumulatively larger over time; if the concerned year is 5 years or more away from the base year, the discrepancy between the 2 methods would be significant.

B) For comparison between non-consecutive years, especially for years further apart, indices derived by chain volume measures are more reliable than direct indices between the concerned years. As mentioned in A), discrepancy in the commodities set gets larger as the concerned years are further apart. Chain volume measures compile indices between each pair of consecutive years with similar commodities set and chain-link them, thus providing better indicators of volume change than direct comparison of years with different commodities sets. Chain volume measures resolve the disadvantages of constant price estimates mentioned in C) in the previous section. In other words, chain volume measures do not simply consider the prices and quantities at 2 time slots but take into account all changes in commodities, qualities and prices between the 2 time slots.

C) As chain volume measures chain-link volume indices of each year, the annual real growth rates are fixed and remain the same even if the reference year is changed; this overcomes the disadvantage of constant price estimates mentioned in D) in the previous section.

D) The disadvantage of chain volume measures of GDP is non-additivity. Apart from the reference year and the following year, volume measures for other years are non-additive. Table 3 shows that the chain volume measures of the total in Period 2 ($52.5) does not equal the sum of the chain volume measures of choy sum ($18.0) and cucumber ($36.0). The main objective of chain volume measures is to calculate the real growth rate, additivity is a minor concern, thus non-additivity characteristics of chain volumes measures are accepted.

Apart from non-additivity, chain volume measures are superior to constant price estimates; therefore, many countries adopted chain volume measures to replace constant price estimates.