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Underestimating the Real Growth of GDP, Personal Income, and Productivity

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  • Martin Feldstein
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    Economists have long recognized that changes in the quality of existing goods and services, along with the introduction of new goods and services, can raise grave difficulties in measuring changes in the real output of the economy. But despite the attention to this subject in the professional literature, there remains insufficient understanding of just how imperfect the existing official estimates actually are. After studying the methods used by the US government statistical agencies as well as the extensive previous academic literature on this subject, I have concluded that, despite the various improvements to statistical methods that have been made through the years, the official data understate the changes of real output and productivity. The official measures provide at best a lower bound on the true real growth rate with no indication of the size of the underestimation. In this essay, I briefly review why national income should not be considered a measure of well-being; describe what government statisticians actually do in their attempt to measure improvements in the quality of goods and services; consider the problem of new products and the various attempts by economists to take new products into account in measuring overall price and output changes; and discuss how the mismeasurement of real output and of prices might be taken into account in considering various questions of economic policy.

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    File URL: https://www.aeaweb.org/articles?id=10.1257/jep.31.2.145
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    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 31 (2017)
    Issue (Month): 2 (Spring)
    Pages: 145-164

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    Handle: RePEc:aea:jecper:v:31:y:2017:i:2:p:145-64
    Note: DOI: 10.1257/jep.31.2.145
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    1. Robert J. Gordon, 2016. "The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War," Economics Books, Princeton University Press, edition 1, number 10544, March.
    2. John G. Fernald, 2015. "Productivity and Potential Output before, during, and after the Great Recession," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 1-51.
    3. Michael J. Boskin, 2000. "Economic Measurement: Progress and Challenges," American Economic Review, American Economic Association, vol. 90(2), pages 247-252, May.
    4. Stephen J. Redding & David E. Weinstein, 2016. "A unified approach to estimating demand and welfare," LSE Research Online Documents on Economics 67681, London School of Economics and Political Science, LSE Library.
    5. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-194, April.
    6. Harley Frazis & Jay Stewart, 2011. "How does household production affect measured income inequality?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 24(1), pages 3-22, January.
    7. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    8. Diane Coyle, 2014. "GDP: A Brief but Affectionate History," Economics Books, Princeton University Press, edition 1, number 10183, March.
    9. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters,in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc.
    10. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
    11. J. Steven Landefeld & Eugene P. Seskin & Barbara M. Fraumeni, 2008. "Taking the Pulse of the Economy: Measuring GDP," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 193-216, Spring.
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