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Sourcing substitution and related price index biases

Author

Listed:
  • Nakamura, Alice O.

    (University of Alberta)

  • Diewert, W. Erwin

    (University of British Columbia and the University of New South Wales)

  • Greenlees, John S.

    (Bureau of Labor Statistics (Retired))

  • Nakamura, Leonard I.

    (Federal Reserve Bank of Philadelphia)

  • Reinsdorf, Marshall B.

    (U.S. Bureau of Economic Analysis)

Abstract

We define a class of bias problems that arise when purchasers shift their expenditures among sellers charging different prices for units of precisely defined and interchangeable product items that are nevertheless regarded as different for the purposes of price measurement. For business-to-business transactions, these shifts can cause sourcing substitution bias in the Producer Price Index (PPI) and the Import Price Index (MPI), as well as potentially in the proposed new true Input Price Index (IPI). Similarly, when consumers shift their expenditures for the same products temporally to take advantage of promotional sales or among retailers charging different per unit prices, this can cause a promotions bias problem in the Consumer Price Index (CPI) or a CPI outlet substitution bias. We recommend alternatives to conventional price indexes that make use of unit values over precisely defined and interchangeable product items. We argue that our proposed ideal target indexes could greatly reduce these biases and make use of increasingly available electronic scanner data on prices and quantities. We also address the challenges national statistics agencies must surmount to produce price index measures more like the specified target ones.

Suggested Citation

  • Nakamura, Alice O. & Diewert, W. Erwin & Greenlees, John S. & Nakamura, Leonard I. & Reinsdorf, Marshall B., 2014. "Sourcing substitution and related price index biases," Working Papers 14-34, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:14-34
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    Citations

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    Cited by:

    1. Gagnon, Etienne & Lopez-Salido, J. David & Sockin, Jason A., 2015. "The Cyclicality of Sales, Regular and Effective Prices: Comment," Finance and Economics Discussion Series 2015-52, Board of Governors of the Federal Reserve System (U.S.).
    2. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    3. Campbell, Douglas L & Pyun, Ju Hyun, 2014. "Through the Looking Glass: A WARPed View of Real Exchange Rate History," MPRA Paper 55870, University Library of Munich, Germany.

    More about this item

    Keywords

    Outlet substitution; Biasin price indexes; Offshoring; Outsourcing; GDP bias; Import price index; Producer price index; PPI; Intermediate input.;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F1 - International Economics - - Trade

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