Chained euros

In the national accounts statistical system, various economic aggregates (such as GDP, investment, household consumption, for instance) are calculated so that changes in value terms can be divided up into a factor that reflects the underlying price changes and a factor which reflects the volume changes. As a result of this sub-division, one can get an idea of how these aggregates develop after adjustment for price changes.

In order to measure the volume growth of GDP and its components, it is therefore necessary to remove the effect of price changes from the changes in value, by keeping prices “constant” as it were. Up until the introduction of chained euros in 2006, this was done on the basis of a “fixed base year”, whereby the information on prices was used so as to compile volume accounts at as detailed a level as possible. Since the relative prices of the base year become less and less relevant as time goes by, the potential distortion in the growth of an aggregate for a given year increases as this year moves further away from the base year. So, in the past, a more recent base year has been chosen every five years for the national accounts. Experience in various countries has nevertheless shown that, in the case of rapidly changing relative prices, the system of a five-yearly update of the base year is inadequate for measuring recent economic growth rates. In the European Union, it was therefore decided to switch over to an annual review of the reference year. The annual update of the price structure, used for calculating the aggregates in volume terms, is tantamount to calculating growth at “chained volume measures”.

By applying chained indices, the volume growth between two consecutive periods, t and t+1, is calculcated using year t’s prices. In this way, volume growth of investment in real (volume) terms between years 1 and 2, for example, is calculated by comparing investment in year 2 expressed in year 1’s prices with investment in year 1. Growth between years 2 and 3 is calculated by comparing investment in year 3 expressed in year 2’s prices with investment in year 2, and so on. The changes between consecutive periods are ‘linked’ together (cumulated) to give a chained index. When the chained index is then finally applied to the values of an aggregate of a selected “reference year”, one obtains a volume series in “chained euros”. Generally speaking, the reference year is changed annually, but some countries do this only once every five years. The choice of the reference year has no influence on the growth profile of the series.

The introduction of chained indices improves the accuracy of the measure of economic growth and results in better international comparability. Accurate volume measurement in the national accounts is important for establishing growth of GDP and its components, as an input for various economic studies investigating the structure and development of the economy in real terms, and as an input for measuring productivity.