Index numbers and the measurement of real GDP

The measures of real GDP and inflation are aggregates of many individual prices and quantities. These variables are measured using fixed-weight indexes, which can give a misleading impression of price and output changes in a particular year if the structures of output and relative prices are different from those in the base year. This measurement problem adds to the uncertainties facing policymakers. ; These ambiguities result from the definitions of output and inflation in use. This article describes alternative measures of growth and inflation that have a stronger theoretical basis and avoid these ambiguities. Operational versions of these measures will be introduced by the Bureau of Economic Analysis in 1992. These new measures will remove one source of uncertainty facing policymakers.