Reference

1 Dec 2013.

The most recent two quarters show growth, in both the euro zone and the wider EU. Nevertheless, the year-over-year change remains negative for the euro zone, so the overall picture is one of stagnation.

In calculating GDP, Eurostat emphasizes what they term a volume series. For each pair of years, GDP in the second year is calculated at the prices of the first year, to get a measure of the growth in volume of goods and services over one year. These growth factors are chained (multiplied) together to give growth over longer periods. In technical terms, growth each year is based on the price structure of a base year one year earlier. Results are expressed relative to a reference year, currently the year 2000, so that the GDP level is expressed in terms of year 2000 euros.

GDP is calculated by Eurostat and retrieved from the European Central Bank Statistical Data Warehouse. Full descriptions of the series used are as follows:

- “Euro area 17 (fixed composition), Working day and seasonally adjusted, Total economy including Rest of the World (all sectors), Gross domestic product at market prices, Total economy, Chain linked, ECU/euro, Main series”
- “EU 27 (fixed composition), Working day and seasonally adjusted, Total economy including Rest of the World (all sectors), Gross domestic product at market prices, Total economy, Chain linked, ECU/euro, Main series”

Selected commentary:

- 15 Nov 2012. Euro zone GDP has been declining for a year now
- 14 Feb 2013. The European recession worsened in Q4
- 15 May 2013. EU recession: mild overall but relentless
- 1 Dec 2013. Europe stagnant

Undated. Eurostat.

http://epp.eurostat.ec.europa.eu/cache/ITY_SDDS/en/nama_esms.htm

“Annual national accounts: Eurostat metadata”

“3.9. Base period

When flows and stocks are valued at the price level in the accounting period they are said to be valued at current prices. Valuation at constant prices (ESA95, 1.25d, 1.56) means valuing flows and stocks at the price of a previous period (called base year). The purpose of the valuation at constant prices is to assess the dynamics of economic development irrespective of price movements (see also Eurostat's “Handbook on price and volume measures in national accounts” for more details). This is achieved by decomposing changes of values over time into changes in prices and changes in volume. Price, value and volume are related via the following central equation:

Value = Volume × Price

Flows and stocks at constant prices are hence said to be in volume terms.

The base year for computation of constant prices is traditionally a single, fixed benchmark year, which is moved ahead about each five years. The whole time series available is then expressed in prices of the new base year.

The calculations to transform the price levels from the current year to the base year were traditionally done in one step. A drawback of this practice is that the further one moves away from the base year, the more irrelevant becomes the price structure of the base year for the economic reality. In particular for economic activities in dynamic fields with rapidly moving prices (such as information and communication technologies) expressing growth in prices of a distant year leads to serious distortions. This is why Commission Decision 98/715/EC demands that the base year must be the previous year. This guarantees that volumes are measured using the most recent price structure. However, this also means that the base is moved ahead with the observation period, and no two years have the same price base, so that volume growth rates cannot be calculated directly from series at previous year's prices. For example, GDP growth for the year 2001 is calculated by dividing GDP 2001 at previous year's prices by GDP 2000 at current prices. Note that both figures are, effectively, expressed in prices of 2000. GDP growth for the year 2002 is in turn calculated by dividing GDP 2002 at previous year's prices by GDP 2001 at current prices. Note that here, both figures are expressed in prices of 2001. Multiplying successive growth rates starting from an arbitrary reference year's level will give a true volume time series. Due to its construction, this is called a chain-linked series. The choice of reference year in chain-linking is arbitrary and a mere convention without effect on growth rates (unlike the choice for a fixed base year, which can have a significant effect on growth rates).

While the moving price base brings more accurate description of economic developments, it comes at a price: chain-linking involves the loss of additivity (i.e. the total does not equal the sum of the parts) for all years except the reference year and the directly following year, which are the only ones actually expressed purely in prices of the reference year. For other years, chain-linked components of GDP will not sum to chain-linked GDP, and chain-linked Member States' GDP will not sum to chain-linked EU GDP. For this reason also, custom aggregations not directly supplied (such as total demand = consumption (P3) + capital formation (P5) + exports (P6)) cannot be derived by simple summation of the chain-linked components, but must be derived from summing the component series at current and at previous year's prices, calculating growth rates and chain-linking the results.

In addition, chain-linking cannot be performed directly on variables that can take both negative and positive values. Thus, no chain-linked series are provided for changes in inventories (P52), acquisition less disposal of valuables (P53) and the external balance (B11, B111 for goods only, B112 for services only). These are available only at current prices and at previous year's prices.

A common presentation of volume data for countries is difficult because they use different calculation methods. Eurostat's online database offers the following:

- Chained level series with reference year 2000: Data shown includes both data directly supplied in chain-linked form by countries, and, for a few countries, still data supplied at constant prices of a fixed base year. The reference year is shifted to 2000 where necessary.
- Levels at prices of the previous year: These figures are intended as input for advanced users to allow construction of custom aggregations and derived measures. Since the price base changes every year, the figures do not constitute a homogeneous time series, so in particular growth rates cannot be derived directly from them. Figures are given only as far as supplied by NSIs.
- Growth rates: Growth rates are derived mechanically from the level series mentioned above (they all give the same growth rates).
- Index series: Index series are derived mechanically from the level series mentioned above. Index series are given for reference years 1995 and 2000. Both series only differ by a scaling factor.

Price indices (deflators) are calculated implicitly by dividing an aggregate measured at current prices by the same aggregate measured at constant prices, the result being multiplied by 100. National accounts aggregates are compiled in value (nominal terms, current prices) and volume (constant prices). Prices (deflators) are implicitly derived from the other two. Some direct price observations enter into the volume compilation of individual variables, but the deflators are aggregate measures of price developments. For direct observations of price dynamics, please consult the price statistics domain on Eurostat's online database.

Implicit deflators are named after the aggregate used. Final consumption expenditure deflators, gross capital formation deflators, export and import deflators measure price movements in their respective domain of the economy.”

[Note Eurostat computes the series that is retrieved above from the ECB.]

2001. Eurostat.

“Handbook on price and volume measures in national accounts”

“Renewed demand for more harmonised national accounts price and volume data came when the European Council in July 1997, agreed on the so-called “Stability and Growth Pact”1. In this political instrument for ensuring the stability of the Euro, the Member States commit themselves to keep their government deficits below 3% of GDP. Only in cases of severe recessions, countries may have a higher deficit. A severe recession is defined by the Pact as “an annual fall in real GDP of at least 2%”. “Real GDP” must be understood here as the growth of the volume of GDP, not the purchasing power of GDP (see section 1.2). This was the first time that growth data were used for administrative purposes, and this stimulated the work that has now led to this handbook. …

Price and volume measurement relates to the decomposition of transaction values in current prices into their price and volume components. In principle, the price components should include changes arising solely from price changes, while all other changes (relating to quantity, quality and compositional changes) should be included in the volume components. The aim is to analyse which changes in aggregates are due to price movements, and which to volume changes. This is also referred to as “constant price” measurement, implying the analysis of economic transactions valued at certain fixed prices. …

This handbook will not discuss … application to the measurement of purchasing power of income flows, where values are divided by price indices related to some selected basket of goods and services. There can be many choices of the basket of goods and services to use as the deflator in these circumstances and the choice depends on the use to be made of the result. The results are often referred to as “real” values.

The objective and process to be followed when deriving “real” measures are fundamentally different from those used when deflating goods and services to produce volume measures. The main purpose of this handbook is to describe the methods suitable for price and volume measurement in the national accounts rather than the estimation of “real” measures.

Therefore, it is preferable not to refer to the volume measure of GDP as “real GDP” as this may suggest deflation of GDP by some general price indices not necessarily that of GDP itself. This handbook will speak either of the (growth of the) volume of GDP or of GDP at constant prices. …

The nature of estimates at constant prices is different from that of estimates at current prices in some fundamental respects. Current price accounts can be considered as the aggregation, within an accounting framework, of transactions that took place and can be evidenced. However, constant price accounts describe an economic situation of a particular year in the prices of another year. In reality, the transactions of the current year would not take place in an identical manner at the prices of that other year.”