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The Early History of Price Index Research

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  • W. Erwin Diewert

Abstract

This paper examines the domestic and foreign fixed investment expenditures of a sample of U.S. multinational firms to explain empirically each type of investment and to determine whether there are significant interactions between them. Models exhibiting two types of interactions, one, financial and the other, production-based, are explored theoretically and empirically. The financial interaction is the result of a model which assumes a risk of bankruptcy and its associated costs; under these circumstances, the firm faces an increasing cost of capital as a function of its debt/equity ratio. Domestic and foreign investment are interdependent, since, in competing for finance, each affects the cost of capital in the other location. Production interactions can arise when, because of start-up costs or other factors that produce nonlinear cost functions, it may become profitable to shift production from the home to the foreign location. The hypotheses are tested on data covering the domestic and foreign operations of seven multinational firms for a period of 16 to 20 years. The firm level investment functions fit reasonably well for both domestic and foreign expenditures; an interdependence between domestic and foreign investment was confirmed frequently through the finance side, but only once via production.

Suggested Citation

  • W. Erwin Diewert, 1988. "The Early History of Price Index Research," NBER Working Papers 2713, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2713 Note: PR
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    1. Balk, Bert M, 1981. "Second Thoughts on Wald's Cost-of-Living Index and Frisch's Double Expenditure Method," Econometrica, Econometric Society, vol. 49(6), pages 1553-1558, November.
    2. Robert B. Archibald, 1977. "On the Theory of Industrial Price Measurement Output Price Indexes," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 57-72 National Bureau of Economic Research, Inc.
    3. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, March.
    4. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
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    Cited by:

    1. Jerry Hausman, 2002. "Sources of Bias and Solutions to Bias in the CPI," NBER Working Papers 9298, National Bureau of Economic Research, Inc.
    2. William D. Nordhaus, 1996. "Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not," NBER Chapters,in: The Economics of New Goods, pages 27-70 National Bureau of Economic Research, Inc.
    3. Ernst R. Berndt & Zvi Griliches & Joshua G. Rosett, 1990. "On the Accuracy of Producer Price Indexes for Pharmaceutical Preparations: An Audit Based on Detailed Firm-Specific Data," NBER Working Papers 3490, National Bureau of Economic Research, Inc.
    4. Berndt, Ernst R & Griliches, Zvi & Rosett, Joshua G, 1993. "Auditing the Producer Price Index: Micro Evidence from Prescription Pharamceutical Preparations," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 251-264, July.
    5. Santiago Rodriguez Feijoo & Alejandro Rodriguez Caro & Carlos Gonzalez Correa, 2003. "A measurement to analyze the relative change in the Absolute Parity of Power Purchase: An application to the European Union," ERSA conference papers ersa03p163, European Regional Science Association.
    6. W. Erwin Diewert, 1995. "Price and Volume Measures in the System of National Accounts," NBER Working Papers 5103, National Bureau of Economic Research, Inc.
    7. Glazer Jacob & Huskamp Haiden A. & McGuire Thomas G., 2012. "A Prescription for Drug Formulary Evaluation: An Application of Price Indexes," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-26, March.
    8. Keith M. Carlson, 1989. "Do price indexes tell us about inflation? A review of the issue," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 12-30.
    9. Manfred Fluch, 2016. "The measurement of inflation in Austria: a historical overview," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 33-60.
    10. Georganta, Zoe, 1997. "The effect of a free market price mechanism on total factor productivity: The case of the agricultural crop industry in Greece," International Journal of Production Economics, Elsevier, vol. 52(1-2), pages 55-71, October.

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