Introduction of Chain-Linked methodology to measure the real Gross Domestic Product (GDP)

In GASTAT continuous efforts to align with the recommendations and international practices from international organizations such as the International Monetary Fund (IMF), Eurostat, and the Organisation for Economic Cooperation and Development (OECD), GASTAT is pleased to announce a significant methodological update to measure the real GDP. Transitioning from the traditional fixed base-year methodology, with the base year 2010, to a more dynamic and internationally recognized approach known as chain-linking. 

This update is due to enhance the accuracy and reliability of economic indicators, as the chain-linking methodology allows a smooth transition between the years, which reflects economic trends and facilitats cross-country comparisons. 
In this document, we will provide an overview of the changes, focusing on key areas such as measurement at current prices, constant prices for the fixed base year (2010), and the new chain-linked measures with reference year 2018.

Measurement at Current Prices

Measurement at current prices remains a fundamental aspect of the National Accounts, reflecting the market value of goods and services produced within the economy, 
which capturs the monetary value of all goods and services produced within an economy during a specific period, without adjusting for changes in prices or inflation. This approach provides a snapshot of the economic gross value added in terms of the actual prices prevailing in the market at the time of production. In other words, it reflects the gross value added without considering the impact of inflationary or deflationary pressures.

In the context of the Saudi National Accounts, this valuation method allows us to understand the overall economic activity and the total income generated by businesses across various sectors. It serves as a starting point for further analysis and helps policymakers, economists, and other stakeholders gauge the size and growth of Saudi economy.

Valuation at Constant Prices for 2010 (Fixed Base-year)

While the fixed base-year methodology has been a longstanding practice, it is essential to acknowledge its limitations, especially in capturing changes in economic structures and behaviors over time. We will provide insights into the valuation at constant prices for 2010, highlighting its role in adjusting for inflation and revealing the real growth of the economy.

Valuation at constant prices is a critical aspect of national accounting that aims to eliminate the impact of price changes or inflation on the measurement of economic output. The fixed base-year methodology, in this case, uses 2010 as the base year against which all subsequent years are compared. The primary goal is to provide a more accurate representation of the real growth of the economy by removing the effects of price changes.

When goods and services are produced, their total value is measured in monetary terms (current prices). However, if prices change between the years being compared, the observed increase or decrease in the total value may be a result of these price changes rather than a genuine change in the produced quantity of goods and services. Valuation at constant prices addresses this issue by expressing the value of production in terms of a fixed price level, allowing for a more accurate assessment of changes in the real volume of economic activity.

Valuation at Constant Prices for the Previous Year and Chain-Linked Volume Measures (with Reference Year 2018)

The core of this document will explore the shift to chain-linking, emphasizing the advantages it brings to the National Accounts. By using a reference year of 2018, we aim to capture a more accurate representation of economic dynamics, adjusting for relative price changes and allowing for a smoother transition between years. This section will delve into the technical aspects of chain-linking and demonstrate its impact on economic indicators.

The shift to chain-linking in the context of national accounts introduces a more sophisticated approach to calculate constant prices, providing a nuanced perspective on economic changes. Unlike the fixed base-year methodology, chain-linking employs a reference year, in this case, 2018, as a point of connection between adjacent years. This method offers a more dynamic and accurate representation of economic dynamics by accounting for relative price changes between years.

Chain-linking addresses some of the limitations associated with fixed base-years, especially when the economic structure and behavior undergo substantial transformations. It allows for a smoother transition and adapts to evolving market conditions. The approach captures not only changes in quantities but also adjusts for variations in prices, offering a more realistic portrayal of economic growth or contraction.
The introduction of chain-linked volume measures prompts an essential discussion on the non-additivity issue. Chain-linking may lead to non-additivity, where the sum of sub-component in different periods may not exactly match the GDP over the entire period. This non-additivity arises due to the inherent flexibility and responsiveness of the chain-linking method to changes in the economic structure. While this issue is acknowledged, it's important to note that the benefits of improved accuracy and representation often outweigh the concerns associated with non-additivity.
In conclusion, the introduction of chain-linked volume measures in the Saudi National Accounts marks a significant step towards aligning our practices with international standards. This transition enhances the robustness of our economic indicators, making them more adaptable to the evolving economic landscape and ensuring their relevance in a global context.
We appreciate the understanding and collaboration of all stakeholders as we embark on this journey towards a more advanced and internationally harmonized system of national accounts.

References

Quarterly National Accounts Manual (2017): International Monetary Fund, chapter 8 “Price and Volume Measures”.
System of National Accounts (2008): chapter 15 “Price and Volume Measures”.
European System of Accounts ESA 2010. Chapter 10 “Price and Volume Measures”.