This paper clarifies the important concept of unit cost in the DRG system and demonstrates that the current method is virtually not a unit cost approach for measuring nonmarket activities. Despite consistency in aggregation, the output volume and price indexes by following the current method are quite stringent.
On the contrary, the suggested method in this paper is consistent with the tradition of applying the Laspeyres formula for volume and the Paasche formula for price indexes construction in the Norwegian national accounts. More importantly, the suggested method is the right unit cost approach, ensuring the consistency with the sound index number theory.
In general, the two sets of measures, one by the current method and the other by the suggested method, will differ. The paper also illustrates that under what conditions, the estimated measures by the current method are upward- or downward biased, compared to those by the suggested method. The paper concludes that more quality work on measuring nonmarket activities is expected and therefore should be encouraged in future research at Statistics Norway.