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Quality Change in Price Indexes

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  • William D. Nordhaus

Abstract

Price indexes provide the fundamental building blocks for measuring the general price level along with real incomes and real output. But the most important single price index for the United States, the CPI, has been criticized as significantly underestimating the pace of quality change. This paper sketches the issues involved in the measurement of quality change in price indexes. It reviews the theory of quality change, discusses how the Bureau of Labor Statistics deals with quality change, and provides examples of measurement issues in practice. It concludes with a proposal to resolve the massive uncertainties in this area.

Suggested Citation

  • William D. Nordhaus, 1998. "Quality Change in Price Indexes," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 59-68, Winter.
  • Handle: RePEc:aea:jecper:v:12:y:1998:i:1:p:59-68
    Note: DOI: 10.1257/jep.12.1.59
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.1.59
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    References listed on IDEAS

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    1. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    2. 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.
    3. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1996. "Are Medical Prices Declining?," NBER Working Papers 5750, National Bureau of Economic Research, Inc.
    4. Griliches, Zvi & Cockburn, Iain, 1994. "Generics and New Goods in Pharmaceutical Price Indexes," American Economic Review, American Economic Association, vol. 84(5), pages 1213-1232, December.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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