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Product Innovations, Price Indices and the (Mis)Measurement of Economic Performance

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  • Manuel Trajtenberg

Abstract

The goal of this paper is to address the problem of 'product innovations' (i.e. new goods. increased variety, and quality change) in the construction of price indices and, by extension, in the measurement of economic performance. The premise is that a great deal of technical progress takes the form of product innovations, but conventional economic statistics fail by and large to reflect them. The approach suggested here consists of two stages: first, the benefits from innovations are estimated with the aid of discrete choice models, and second, those benefits are used to construct 'quality adjusted' price indices. Following a discussion of the merits of such approach vis a vis hedonic price indices, I apply it to the case of CT (Computed Tomography) Scanners. The main finding is that the rate of decline in the real price of CT scanners was a staggering 55% per year (on average) over the first decade of the technology. By contrast, an hedonic-based index captures just a small fraction of the decline, and a simple (unadjusted) price index shows a substantial price increase over the same period. Thus, conventional economic indicators might be missing indeed a great deal of the welfare consequences of technical advance, particularly during the initial stages of the product cycle of new products.

Suggested Citation

  • Manuel Trajtenberg, 1990. "Product Innovations, Price Indices and the (Mis)Measurement of Economic Performance," NBER Working Papers 3261, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3261
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    References listed on IDEAS

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    1. Dan Usher, 1973. "The Measurement of Economic Growth," Working Paper 145, Economics Department, Queen's University.
    2. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, February.
    3. Trajtenberg, Manuel, 1989. "The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 444-479, April.
    4. W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters, in: The Measurement of Capital, pages 433-538, National Bureau of Economic Research, Inc.
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    1. Zvi Griliches, 1997. "The Commission Report on the Consumer Price Index (panel discussion)," Review, Federal Reserve Bank of St. Louis, issue May, pages 169-173.
    2. Kenneth Flamm, 1993. "Measurement of DRAM Prices: Technology and Market Structure," NBER Chapters, in: Price Measurements and Their Uses, pages 157-206, National Bureau of Economic Research, Inc.
    3. Mark Bils & Peter J. Klenow, 2001. "Quantifying Quality Growth," American Economic Review, American Economic Association, vol. 91(4), pages 1006-1030, September.
    4. Yang, Hongyan & Steensma, H. Kevin, 2014. "When do firms rely on their knowledge spillover recipients for guidance in exploring unfamiliar knowledge?," Research Policy, Elsevier, vol. 43(9), pages 1496-1507.
    5. Abe Dunn, 2012. "Drug Innovations and Welfare Measures Computed from Market Demand: The Case of Anti-cholesterol Drugs," American Economic Journal: Applied Economics, American Economic Association, vol. 4(3), pages 167-189, July.
    6. Robert C. Feenstra & Clinton R. Shiells, 1996. "Bias in U.S. Import Prices and Demand," NBER Chapters, in: The Economics of New Goods, pages 249-276, National Bureau of Economic Research, Inc.
    7. Marshall B. Reinsdorf & Brent R. Moulton, 1996. "The Construction of Basic Components of Cost-of-Living Indexes," NBER Chapters, in: The Economics of New Goods, pages 397-436, National Bureau of Economic Research, Inc.
    8. Kjersten Whittington & Laurel Smith-Doerr, 2005. "Gender and Commercial Science: Women’s Patenting in the Life Sciences," The Journal of Technology Transfer, Springer, vol. 30(4), pages 355-370, October.

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