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Errors of Measurement in Output Deflators

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  • Lichtenberg, Frank R
  • Griliches, Zvi

Abstract

In this paper we investigate the incidence of measurement errors in two independent estimates of long-term price change, within the framework of "multiple indicators" models of price measurement. We develop estimates of the measurement-error variances associated with both the Producer Price Index (PPI) and the Census Unit Value Relative (UVR) . Our estimates provide support for the generally accepted view that the PPI is a far more reliable indicator of long-term price change: the estimated signal-to-noise ratios for the PPI and UVR are 2.72 and 0.53, respectively. Our estimates should be useful for both constructing an optimal indicator of price change, and for identifying econometric models including error-ridden price- or output-growth terms as regressors. Our analysis suggests that "scores" assigned to product deflators provide useful information about their reliability. By extending our model to explicitly incorporate product-quality change, we are able to assess the importance of the problem posed by quality change for price and productivity measurement. Less than half of quality change, which we estimate to occur at an average annual rate of 1.3 percent, appears to be adjusted for in the PPI. Consequently, estimates of productivity growth based on the PPI underestimate "quality-adjusted" productivity growth by an estimated 43 percent.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 7 (1989)
Issue (Month): 1 (January)
Pages: 1-9

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Handle: RePEc:bes:jnlbes:v:7:y:1989:i:1:p:1-9

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References

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  1. Zvi Griliches, 1984. "Data Problems in Econometrics," NBER Technical Working Papers 0039, National Bureau of Economic Research, Inc.
  2. Lichtenberg, Frank R., 1986. "Energy prices and induced innovation," Research Policy, Elsevier, vol. 15(2), pages 67-75, April.
  3. Zvi Griliches, 1998. "Interindustry Technology Flows and Productivity Growth: A Reexamination," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 241-250 National Bureau of Economic Research, Inc.
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Cited by:
  1. Freeman, Scott L. & Niefer, Mark J. & Roop, Joseph M., 1997. "Measuring industrial energy intensity: practical issues and problems," Energy Policy, Elsevier, vol. 25(7-9), pages 703-714.
  2. Bosworth, Derek & Massini, Silvia & Nakayama, Masako, 2005. "Quality change and productivity improvement in the Japanese economy," Japan and the World Economy, Elsevier, vol. 17(1), pages 1-23, January.
  3. Frank R. Lichtenberg, 1996. "The Output Contributions of Computer Equipment and Personnel: A Firm- Level Analysis," NBER Working Papers 4540, National Bureau of Economic Research, Inc.
  4. Peter Hooper & Elizabeth Vrankovich, 1995. "International comparisons of the levels of unit labor costs in manufacturing," International Finance Discussion Papers 527, Board of Governors of the Federal Reserve System (U.S.).
  5. Georganta, Zoe, 1997. "The effect of a free market price mechanism on total factor productivity: The case of the agricultural crop industry in Greece," International Journal of Production Economics, Elsevier, vol. 52(1-2), pages 55-71, October.
  6. Goolsbee, Austan, 2004. "Taxes and the quality of capital," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 519-543, March.
  7. Jeffrey Bernstein & Theofanis Mamuneas, 2008. "Public infrastructure, input efficiency and productivity growth in the Canadian food processing industry," Journal of Productivity Analysis, Springer, vol. 29(1), pages 1-13, February.
  8. Thomas A Abbott III, 1992. "Price Dispersion In U.S. Manufacturing: Implications For The Aggregation Of Products And Firms," Working Papers 92-3, Center for Economic Studies, U.S. Census Bureau.
  9. Donald Siegel, 1991. "Errors in Output Deflators Revisited: Unit Values and the PPI," NBER Working Papers 3935, National Bureau of Economic Research, Inc.

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