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Bias in U.S. Import Prices and Demand

In: The Economics of New Goods

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  • Robert C. Feenstra
  • Clinton R. Shiells

Abstract

The purpose of the paper is to measure the potential bias in the U.S. import price index due to the appearance of new product varieties, or new foreign suppliers, and determine the effect of this bias on the estimated income elasticity of import demand. Existing import price indexes are based on a sample of products from importing firms. We argue that if the share of import expenditure on the sampled products is falling over time, this will lead to an upward bias in the measured index. Using a correction based on the falling expenditure share on sampled countries, we find that the income elasticity of aggregate U.S. import demand is reduced from 2.5 to 1.7, or about halfway to unity. Our estimates suggest that the aggregate import price index is upward biased by about one and one-half percentage points annually.

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This chapter was published in:

  • Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6069.

    Handle: RePEc:nbr:nberch:6069

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    References

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    1. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
    2. Peter Hooper, 1989. "Exchange rates and U.S. external adjustment in the short run and the long run," International Finance Discussion Papers 346, Board of Governors of the Federal Reserve System (U.S.).
    3. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March.
    4. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    5. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-28, May.
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    Cited by:
    1. Richards, Timothy J. & Patterson, Paul M., 1998. "Dynamic Complementarity In Export Promotion: The Market Access Program In Fruits And Vegetables," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
    2. Kichun Kang, 2012. "Is the "Houthakker-Magee" Finding Durable? Evidence from Disaggregated Trade Flows between China and Korea," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 299-316, November.
    3. Catherine L. Mann, 2002. "Perspectives on the U.S. Current Account Deficit and Sustainability," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 131-152, Summer.
    4. Bruce A. Blonigen, 1999. "In Search of Substitution Between Foreign Production and Exports," NBER Working Papers 7154, National Bureau of Economic Research, Inc.
    5. Naoko Shinkai, 2000. "¿Explica el teorema Stopler-Samuelson el desplazamiento de los salarios? El vínculo entre el comercio internacional y los salarios en países latinoamericanos," Research Department Publications 4238, Inter-American Development Bank, Research Department.
    6. Naoko Shinkai, 2000. "Does the Stopler-Samuelson Theorem Explain the Movement in Wages? The Linkage Between Trade and Wages in Latin American Countries," Research Department Publications 4237, Inter-American Development Bank, Research Department.
    7. Lukas Mohler, 2012. "Variety Gains and the Extensive Margin of Trade," Working papers 2012/16, Faculty of Business and Economics - University of Basel.
    8. Robert C. Feenstra, 1996. "U.S. Imports, 1972-1994: Data and Concordances," NBER Working Papers 5515, National Bureau of Economic Research, Inc.
    9. Thomas von Brasch, 2013. "The cost-of-living index with trade barriers," Discussion Papers 751, Research Department of Statistics Norway.

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