Price Indexes - General

The internationally agreed guidelines for national economic accounts, System of National Accounts 2008 (hereafter referred to as SNA 2008) (United Nations Statistics Division 2008), explicitly recommend that illegal market activity should be included in the measured economy. This recommendation has not yet been implemented by the U.S. Bureau of Economic Analysis (BEA) because of challenges inherent in identifying suitable source data and differences in conceptual traditions. This paper explores how tracking illegal activity in the U.S. national economic accounts might impact nominal Gross Domestic Product (GDP), real GDP, productivity, and other economic statistics. Nominal GDP rises in 2017 by more than 1 percent when illegal activity is tracked in the U.S. National Income and Product Accounts (NIPAs). By category, illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion. Real GDP and productivity growth also change. Real illegal output grew faster than overall GDP during the 1970s and post–2008. As a result, tracking illegal activity ameliorates both the 1970s economic slowdown and the post–2008 economic slowdown considerably.

Foreign trade enables a nation to consume a different mix of goods and services than it produces, so to measure real gross domestic income (GDI) for an open economy, we must deflate by an index of the prices of the things that this income is used to buy, not the price index for GDP. The differences between these two indexes come from the export and import components of the GDP, and are measured by the trading gains index. Fisher indexes are a natural way to estimate the conceptual economic indexes of trading gains and real GDI because they are averages of the theoretical upper and lower bounds of the economic indexes. They can be decomposed in a way that permits analyses of the factors driving changes in trading gains, such as changes in the terms of trade and in the relative price of tradables, or changes in the prices of particular commodities. Applying these methods to the United States, we find that trading gains have a median absolute effect on US real GDI of 0.2 percentage points in annual data. The petroleum price shocks that occurred in late 1973 and in 1980 subtracted more than a full percentage point from the annual growth of real GDI, and in the first half of 2008 price increases in petroleum and other imported commodities subtracted 2 percentage points from the annual rate of growth of real GDI, making it negative despite the steady growth of real GDP. On the other hand, with petroleum prices excluded, US terms of trade begin to improve steadily starting in 1995 and the relative price of tradables falls. These effects increase the growth rate of US real GDI by 0.15 percent per year on average.