Friday, November 2, 2007

NIPA Concepts : Oily or Wiley?

Greg Mankiw defends the NIPA accounting mechanisms as "straightforward and unobjectionable", when looking at the shot-term oil impact on the equation, Y = C + I + G + (X-M), brought up in this MarketWatch article.

What he may not know is that in the 1980s, during the last oil price rise shock, most economic forecasters got it wrong.

I don't have the as-reported figures (what's in the databases are revisions), but there are two things, as best I recall (caveat reader!), at work.

One, the import price index follows a different methodology (or timing - the initial import figures may also be lagged).

The net result - again, going just on recollection of the story - is an counter-intuitive situation in which GDP rises during an "external" oil price shock, due to subtracting a highly negative number for real goods imports (or a greatly reduced, only slightly positive one).

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