- What is the Fisher formula?
- What is the difference between the GDP at factor cost and the GDP at basic prices?
What is the Fisher formula?
Statistics Canada replaced the Laspeyres formula by the Fisher formula. The Laspeyres method of calculation calculated the real expenditure-based GDP estimate by using the price levels of a base year, and by changing only periodically that base year. As such, for any given year the Laspeyres formula was adding up the volume changes by using the price levels of the base year as weights.
This methodology produced very accurate results in periods where all prices were moving at almost the same pace. However, the use of the Laspeyres formula created inaccurate results in periods when prices did not move in a similar fashion. This is what happened, for example, in the 1990s, with the rapid technological expansion of the Information and Communication Technology (ICT) industries. The expansion of those industries has led to a decline in the prices of the equipment and services that they produce, and the Laspeyres volume measure over-estimated the real economic growth in that sector.
Given that the Chain Fisher Volume Index formula is chained quarterly instead of periodically, the Fisher index eliminates the problems reported above, and therefore produces the most accurate measure of quarter-to-quarter growth in GDP and its components. This is why Statistics Canada made out of the Fisher formula its official measure of the real expenditure-based GDP.
What is the difference between the GDP at factor cost and the GDP at basic prices?
Whereas in the past, Statistics Canada published net domestic product at factor cost, this practice changed with the publication of the estimates of the first quarter of 2001 of the national economic and financial accounts. To bring the Canadian System of National Economic Accounts into line with international standards, the valuation of production is now done according to basic prices.
The concept of GDP at basic prices differs from the concept of GDP at factor costs in that the former includes net indirect taxes (indirect taxes less subsidies) attached to factors of production. For example, whereas property taxes, capital taxes and payroll taxes were not included in the valuation of GDP at factor costs, they are included in the valuation of GDP at basic prices. These production expenses are included in GDP at basic prices, subtracting from them any subsidies attached to factors of production, such as subsidies allocated for job creation and training.
The concept of GDP at basic prices also differs from GDP at market prices, but in this case the difference concerns the taxes and subsidies on the products themselves, such as sales taxes, fuel taxes, duties and taxes on imports, excise taxes on tobacco and alcohol products and subsidies paid on agricultural commodities, transportation services and energy. Whereas production at basic prices excludes taxes and subsidies on products, GDP at market prices includes taxes net of subsidies on products.