Offshoring Bias in U.S. Manufacturing
AbstractIn this paper, we show that the substitution of imported for domestically produced goods and services—often known as offshoring—can lead to overestimates of U.S. productivity growth and value added. We explore how the measurement of productivity and value added in manufacturing has been affected by the dramatic rise in imports of manufactured goods, which more than doubled from 1997 to 2007. We argue that, analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in existing price indexes. Just as the CPI fails to capture fully the lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. As a result, the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in multifactor productivity and real value added in the manufacturing sector have been overstated. We estimate that average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage point and real value added growth by 0.2 to 0.5 percentage point from 1997 to 2007. Moreover, this bias may have accounted for a fifth to a half of the growth in real value added in manufacturing output excluding the computer and electronics industry.
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Bibliographic InfoArticle provided by American Economic Association in its journal Journal of Economic Perspectives.
Volume (Year): 25 (2011)
Issue (Month): 2 (Spring)
Other versions of this item:
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
- L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
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- Feenstra, Robert C. & Jensen, J. Bradford, 2012.
"Evaluating estimates of materials offshoring from US manufacturing,"
Elsevier, vol. 117(1), pages 170-173.
- Robert C. Feenstra & J. Bradford Jensen, 2012. "Evaluating Estimates of Materials Offshoring from U.S. Manufacturing," NBER Working Papers 17916, National Bureau of Economic Research, Inc.
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- Harchaoui, Tarek M., 2012. "The Europe-U.S. Retail Trade Productivity Gap in a Rear-view Mirror," GGDC Research Memorandum GD-127, Groningen Growth and Development Centre, University of Groningen.
- Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports 591, Federal Reserve Bank of New York.
- David M. Byrne & Brian K. Kovak & Ryan Michaels, 2013. "Price and quality dispersion in an offshoring market: evidence from semiconductor production services," Finance and Economics Discussion Series 2013-06, Board of Governors of the Federal Reserve System (U.S.).
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