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Product Creation and Destruction: Evidence and Price Implications

  • Christian Broda
  • David E. Weinstein

This paper describes the extent of product creation and destruction in a large sector of the US economy. We find four times more entry and exit in product markets than is found in labor markets because most product turnover happens within firms. Net product creation is strongly procyclical and primarily driven by creation rather than destruction. We find that a cost-of-living index that takes product turnover into account is 0.8 percentage points per year lower than a "fixed goods" price index like the CPI. The procyclicality of the bias implies that business cycles are more volatile than indicated by official statistics. (JEL E31, E32, L11, O31)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 3 (June)
Pages: 691-723

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:3:p:691-723
Note: DOI: 10.1257/aer.100.3.691
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  10. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
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  13. Ricardo J. Caballero & Mohamad L. Hammour, 1994. "On the Timing and Efficiency of Creative Destruction," NBER Working Papers 4768, National Bureau of Economic Research, Inc.
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  16. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
  17. William D. Nordhaus, 1998. "Quality Change in Price Indexes," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 59-68, Winter.
  18. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  19. Matthew D. Shapiro & David W. Wilcox, 1996. "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Working Papers 5590, National Bureau of Economic Research, Inc.
  20. Geroski, P A & Walters, C F, 1995. "Innovative Activity over the Business Cycle," Economic Journal, Royal Economic Society, vol. 105(431), pages 916-28, July.
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  23. Brent R. Moulton & Karin E. Moses, 1997. "Addressing the Quality Change Issue in the Consumer Price Index," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 305-366.
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