Unbalanced Industry Demand and Supply Shifts:Implications for Economic Growth

in Canada and the United States

MEPA/APME

Presentation to The 2008 World Congress on National Accounts and Economic

Performance Measures for NationsMay 12–17, 2008

MEPA/APME

Anik Dufour, Jianmin Tang, and Weimin Wang

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Introduction: motivation

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Real GDP is non-additive

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A proxy

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Introduction: how does an industry influence real aggregate GDP in the chained-Fisher index?

– Real industry output

– Industry output prices

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Introduction: what drive a change in industry output and price?

– Supply shift, and

– Demand shift

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Introduction: supply shifts and demand shifts are often unbalanced across industries.

– Positive supply shifts: • more for the manufacturing• less for some services industries

– Positive demand shifts:• More for services • Less for goods

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Introduction: production resources will be reallocated under unbalanced industry demand and supply shifts

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Objective

• What are the industry contributions to

– aggregate GDP growth, or

– aggregate labour productivity growth?

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Real GDP

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i are industry nominal gross output, the real gross output, and the

gross output deflator mii pmm and , r

i are industry nominal intermediate inputs, the real intermediate

inputs, and the intermediate input deflator mi

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Real GDP growth from year z to year t

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Industry contributions to real GDP growth

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1st term: pure quantity effect2nd term: pure price effect3rd term: the interaction of the first two effects.

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Major desirable properties

Consistent with real GDP in the chained-Fisher index

Additive for any long period

Invariant to base-year

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Canada: industry contribution to aggregate GDP growth1981-2000

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US: industry contribution to aggregate GDP growth1981-2000

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Aggregate labour productivity

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H is total hours worked; rX is labour productivity

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ix are industry real gross output per hour worked and real intermediate

input per hour worked

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ip~ being real

gross output price)

imi

mi lps ~~ is industry intermediate input relative size ( Hhl ii and m

ip~ being

real intermediate input price).

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Aggregate labour productivity growth from year z to year t

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Industry contributions to aggregate labour productivity growth

1st term: the pure productivity effect 2nd term: the relative size effect 3rd term: the interaction of the first two effects.

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Major desirable properties

Consistent with real GDP in the chained-Fisher index

Additive for any long period

Invariant to base-year

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Relative size by industry in Canada and the U.S.

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Canada: industry contribution to aggregate labour productivity growth, 1981-2000

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U.S.: industry contribution to aggregate labour productivity growth, 1981-2000

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Conclusions

1. This paper provides a decomposition technique to study industry contribution to aggregate output and labour productivity growth. The technique is consistent with real GDP in the chained-Fisher index and has several desirable properties.

2. The framework distinguishes the industry contribution from changes in the industry output and changes in industry’s output price. It shows that over the period 1981-2000, the service sector was the major contributor to both real GDP growth and aggregate labour productivity growth.

3. The estimate of the contribution for the service sector is much higher than estimates using traditional methods that focus only on the quantity effect. By ignoring the price effect, traditional methods underestimate the contributions of service industries with rising real output prices to real GDP growth and aggregate labour productivity growth.

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