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Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software

Author

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  • Christopher Knittel
  • Robert Feenstra

    (Department of Economics, University of California Davis)

Abstract

In the second-half of the 1990s, the positive impact of information technologyon productivity growth for the United States became apparent. The measurement of thisproductivity improvement depends on hedonic procedures adopted by the Bureau ofLabor Statistics (BLS) and Bureau of Economic Analysis (BEA). In this paper wesuggest a new reason why conventional hedonic methods may overstate the price declineof personal computers. We model computers as a durable good and suppose thatsoftware changes over time, which influences the efficiency of a computer. Anticipatingfuture increases in software, purchasers may ?overbuy? characteristics, in the sense thatthe purchased bundle of characteristics is not fully utilized in the first months or year thata computer is owned. In this case, we argue that hedonic procedures do not provide validbounds on the true price of computer services at the time the machine is purchased withthe concurrent level of software. To assess these theoretical results we estimate themodel and find that before 2000 the hedonic price index constructed with BLS methodsoverstates the fall in computer prices. After 2000, however, the BLS hedonic index fallsmore slowly, reflecting the reduced marginal cost of acquiring (and therefore marginalbenefit to users) of characteristics such as RAM, hard disk space or speed.

Suggested Citation

  • Christopher Knittel & Robert Feenstra, 2006. "Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software," Working Papers 76, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:76
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    References listed on IDEAS

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    Cited by:

    1. Robert J Hill, 2004. "Inflation Measurement for Central Bankers," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
    2. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2012. "Americans Do IT Better: US Multinationals and the Productivity Miracle," American Economic Review, American Economic Association, vol. 102(1), pages 167-201, February.
    3. Susan N. Houseman & Timothy J. Bartik & Timothy J. Sturgeon, 2014. "Measuring Manufacturing: How the Computer and Semiconductor Industries Affect the Numbers and Perceptions," Upjohn Working Papers 14-209, W.E. Upjohn Institute for Employment Research.
    4. W. Erwin Diewert, 2005. "Issues in the Measurement of Capital Services, Depreciation, Asset Price Changes, and Interest Rates," NBER Chapters, in: Measuring Capital in the New Economy, pages 479-556, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    industrial;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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