Real real GDP

We have already reported that real GDP in the United States is biased by the change in definition of the GDP deflator around 1978. (According to “Concepts and Methods of the U.S. NIPA” the growth rate of real GDP is the growth rate of nominal GDP reduced by the overall change in prices as expressed by the GDP deflator or the economy-wide price index.) Figure 1 shows that before 1978 the GDP deflator and CPI were similar and their difference is negligible since 1929. In 1978, a new definition of the GDP deflator was introduced and the curves coinciding before 1978 started to deviate. In 2010, the deviation was approximately 20%.

A reasonable assumption on the new definition of the GDP deflator is that it should also be applied to the time series before 1978. This would reduce the bias introduced in the time series around 1978. Figure 1 demonstrates (dashed line) that the growth rate of the CPI after 1978 is approximately 20% higher that the rate of the GDP deflator growth. Without loss of generality, one may assume that the GDP deflator had been growing at a rate approximately 20% lower than the CPI before 1978. In Figure 1, green line represents the GDP deflator before 1978. Since the growth rate of the GDP deflator was lower the over all change between 1929 and 2010 is also smaller than that of the CPI.   

The difference between the GDP deflator and CPI has an immediate consequence as related to real GDP. When applied to the real GDP estimates published by the Bureau of Economic Analysis,   the corrected GDP deflator provides a more accurate time series. One must use this corrected time series in economics and econometric research in order to avoid the apparent bias.

To begin with, we have updated our comparison of real GDP and real GDP per capita growth. This comparison has demonstrated that the fall in real GDP (recession) has actually returned the growth trajectory to the long-term trend and there is no output gap as estimated from real GDP time series. Figure 2 depicts two old and two new (corrected) curves. One can see that the new curves are above the old ones since the corrected GDP deflator is lower than the CPI and the updated real GDP estimates are higher than the original estimates. The corrected real GDP curve implies a much larger output gap that makes this hypothesis truly void. Essentially, the growth rate between 1930 and 1960 was so high that it can never be repeated.  As a result, the Solow model (constant returns to scale) behind the output gap is likely to be wrong.

Figure 1. Cumulative growth rate (the sum of annual inflation rates) of various definitions of inflation since 1929. 

Figure 2. Old and corrected (corr.) estimates of real GDP and real GDP per capita. The former estimates are below the new ones. 

Update 28.10.2011. Corrected table of real GDP per capita and real GDP in 2005 US $

 

2010 42270 13108145194

2009 41377 12722814211

2008 43242 13181625195

2007 43791 13225891467

2006 43399 12978410715

2005 42681 12643309646

2004 41792 12265967955

2003 40769 11857542216

2002 40108 11556298822

2001 39769 11347579296

2000 39750 11226180266

1999 38592 10779826176

1998 37238 10283422652

1997 36102 9854329716

1996 34977 9433786578

1995 34112 9093849856

1994 33671 8870793305

1993 32747 8523454654

1992 32255 8287019110

1991 31614 8015097420

1990 32112 8033812272

1989 31877 7885955399

1988 31069 7613800209

1987 30115 7313216945

1986 29443 7086429569

1985 28717 6849176802

1984 27823 6577190262

1983 26186 6136243938

1982 25282 5870935476

1981 26030 5987108240

1980 25640 5838894640

1979 26010 5855007060

1978 25503 5677707387

1977 24150 5320037949

1976 23103 5038386795

1975 21814 4711459533

1974 21689 4639185468

1973 21796 4619427179

1972 20696 4344618556

1971 19729 4097469291

1970 19161 3929633433

1969 19185 3889478681

1968 18673 3748418138

1967 17905 3558699243

1966 17580 3456136296

1965 16656 3237016460

1964 15817 3035727724

1963 15129 2864008171

1962 14684 2739924324

1961 14039 2579516585

1960 13910 2514340896

1959 13838 2451111168

1958 13078 2277479719

1957 13353 2287102029

1956 13298 2237003680

1955 13280 2194815712

1954 12594 2045223652

1953 12885 2055915430

1952 12487 1959856824

1951 12096 1866190324

1950 11400 1729138416

1949 10677 1592940944

1948 10795 1582831140

1947 10309 1485823522

1946 10482 1482021159

1945 11855 1658907921

1944 12093 1673619102

1943 11231 1535740268

1942 9643 1300405392

1941 8175 1090577563

1940 7044 930616096

1939 6542 857231031

1938 6120 795393311

1937 6356 819695449

1936 6072 778270922

1935 5389 686317930

1934 4963 627750020

1933 4535 570028178

1932 4683 585161480

1931 5488 681318834

1930 5933 730845272

1929 6562 799800744