IDEAS home Printed from https://ideas.repec.org/p/hit/rcesrs/dp18-1.html
   My bibliography  Save this paper

Quantifying and Accounting for Quality Differences in Services in International Price Comparisons: A Bilateral Price Comparison between United States and Japan

Author

Listed:
  • Abe, Naohito
  • Fukao, Kyoji
  • Ikeuchi, Kenta
  • Rao, D.S. Prasada

Abstract

Purchasing power parities (PPPs) from the International Comparison Program (ICP) are used for cross-country comparisons of price levels and real gross domestic product (GDP), household consumption and investment. PPPs from the ICP are also used in compiling internationally comparable output aggregates and making productivity comparisons in the KLEMS initiative. PPP compilation is anchored on the principle of comparing the like with like and price data are collected for goods and services with detailed specifications in the form of structural product descriptions. While this approach works well for goods, it is not effective in the case of services. If differences in service quality exist, these get reflected in the PPPs from the ICP. In this paper, we focus on the USA-Japan bilateral price comparison in the 2014 ICP in the OECD region and estimate bias induced by differences in quality of services in. Service quality is driven by various unobservable factors. In this paper we make use of data on quality differences and consumers’ willingness to pay collected through a specialised survey conducted by the Japan Productivity Center early in 2017. Data are collected from a large sample of 517 respondents from USA and 519 respondents from Japan, covering 28 service items including transport, restaurants, retail services, health and education. Estimates of consumers’ willingness to pay for quality differences in services by the US and Japanese consumers are obtained using standard econometric methodology, these are in turn used in estimating quality adjustment factors that can be applied to price data used in PPP computation. Using the Sato-Vartia index, which has useful analytical and decomposition properties, we find PPP for household consumption (including real estate services) of 113 JPY per US dollar reduces to 104 JPY per dollar after adjusting for quality differences. When real estate services are not included, PPP reduces from 95 JPY to 87 JPY after quality adjustment. The paper also presents labour productivity estimates before and after quality adjustment for a number of service sectors including transport and storage; retail trade; hotels and restaurants; and other subsectors. Our exploratory study demonstrates that adjustment for quality differences in services is feasible and such adjustments are important for making meaningful international price comparisons.

Suggested Citation

  • Abe, Naohito & Fukao, Kyoji & Ikeuchi, Kenta & Rao, D.S. Prasada, 2018. "Quantifying and Accounting for Quality Differences in Services in International Price Comparisons: A Bilateral Price Comparison between United States and Japan," RCESR Discussion Paper Series DP18-1, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:rcesrs:dp18-1
    as

    Download full text from publisher

    File URL: http://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/29080/dp18-1_rcesr.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    International comparisons; services; quality differences; willingness to pay; Sato-Vartia Index;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hit:rcesrs:dp18-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/eshitjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Resources Section, Hitotsubashi University Library (email available below). General contact details of provider: https://edirc.repec.org/data/eshitjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.