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Chain linking is a method of estimating statistics for different years at Constant Prices.

In a chain linked GDP series, we calculate the value of goods and services produced this year using the prices these things cost last year. In that way, we remove the effect of price (value effect) and the remaining GDP growth will be due to more goods and services being produced (volume effect). It is usually the volume effect that is the most meaningful. 

We then calculate the value of goods and services produced last year using the prices from the previous year. This goes on backwards through all the years in a chain of previous year's prices to 1995. 

We then take a recent year as the chain-linked reference year (2018 for the NIE 2019 publication). In the reference year the current price GDP is the same as the constant price GDP. We apply the chain of yearly changes back to 1995, and forward to the latest year to express GDP at constant prices over the whole series. The year-on-year percentage changes in chain-linked GDP provide the real economic growth rates or contraction rates for the economy in a given year.

The alternative to chain linking is to have a fixed base year and calculate all changes relative to that year. Having a fixed base can cause problems because economies change all the time, and (for example) measuring the economy in 2020 at 1995 prices would create distortions. For this reason chain linking is the preferred method of calculating constant prices.

Read next: Basic Prices

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