Construction Deflators and Measurement of Output

Abstract

Through the system of national accounts a wide range of macroeconomic data is available, such as output, national income and expenditure. From the national accounts indexes of output per person employed and output per hour worked are derived, giving the basic measures of labour productivity. There are a range of issues associated with the macroeconomic measurement of production, output and labour, capital and multifactor (MFP) productivity. This paper focuses on specific measurement problems found in the deflators used in estimating the value of construction output. The purpose of this paper is to review deflators in general and construction deflators in particular, and to identify the major problems found in adjusting current prices to constant prices using these deflators. The topics covered include deflation techniques, measurement of output quality and capital inputs, and the use of input price indexes. A range of alternative construction cost indexes and deflators identified in the UK and US literature are discussed, and the extent of similarities between all these indexes identified. The approach taken is to, firstly, discuss the general characteristics of deflators and the problems that are commonly recognized in their application, and secondly, to analyse the features of deflators in the context of measurement of the output of the construction industry.