Double Deflation in National Accounts

Double deflation is a method for measuring the volume of value added after removing price changes. It estimates real gross value added (GVA) by deflating output and intermediate consumption separately with appropriate price indices, and then subtracting real intermediate consumption from real output.

How the calculation works

Nominal output and nominal intermediate consumption are first compiled at current prices. Each is then converted into volume terms using a price index representing its own product composition and referenced to the same base or reference period.

• Real output = nominal output divided by the output price index, after adjusting the index base appropriately.
• Real intermediate consumption = nominal intermediate consumption divided by the input price index.
• Real GVA = real output minus real intermediate consumption.
• For example, if nominal output is 120 with an output price index of 120, real output is 100. If intermediate consumption is 55 with an input price index of 110, real intermediate consumption is 50; real GVA is therefore 50.

Why two deflators are used

Output prices and the prices of inputs such as materials, energy and services may change at different rates. Using separate output and input price indices prevents these relative price movements from being mistaken for changes in production volume.

• A single-deflation method applies one price or volume indicator to value added, output or another related aggregate.
• Double deflation better reflects changes in the volume of value added when output and input prices diverge significantly.

Data requirements and limitations

The method requires detailed and compatible current-price data, product-level price indices and consistent classifications for both output and inputs. Since real GVA is the difference between two independently estimated aggregates, errors in either can substantially affect the residual.

• Reliable deflators must reflect changes in product mix, quality and transaction prices.
• The method can produce volatile estimates when real value added is small relative to gross output and intermediate consumption.
• Where suitable input price indices are unavailable, statistical agencies may need proxy indices or alternative volume indicators.