Computers and the trade deficit: the case of the falling prices
This paper investigates two issues related to international trade in computers: measurement and prediction. Because of the rapid technological advancement in the computer industry, the Bureau of Economic Analysis (BEA) measures computer prices using techniques that adjust for quality change. The constructed hedonic index is essentially a domestic price measure, but the BEA uses it for the deflation of international sales and purchases of computers. This paper begins with a review of the theory behind hedonic price indexes, and then proceeds to discuss the concerns that arise when a domestic index is used to deflate international transactions. ; If the computer industry is sufficiently different from other industries, separate treatment of computers in empirical models of international trade may be necessary to capture historical developments and predict future outcomes. This paper examines the simulation performance of a conventional aggregate trade model, a modified aggregate trade model, and a model that disaggregates computers. The model with computers disaggregated is shown to out-perform the other models.
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