TABLE OF CONTENTS
Prefatory Note
Introduction What are the Issues? - W. Erwin Diewert, John Greenlees, Charles Hulten
DOI: 10.7208/chicago/9780226148571.003.0001
[Cost of Living, COLI, Consumer Price Index, CPI, Boskin Report, product quality]
The role of the methodological foundation for a Consumer Price Index (CPI) has been examined and advocated in two previous reviews of the CPI: the 1961 Stigler Report2 and the 1996 Boskin Report. The role of the Cost-of-Living Index (COLI) concept and its relation to fixed-weight indexes has been central to the debate over the CPI for more than four decades. The COLI approach to CPI index construction is superior to either the Cost-of-Goods Index or test approaches, but it is noted that the test approach can be useful on occasion as a supplement to the economic approach to index construction. In the Boskin Report, issues in quality adjustment played a prominent role because the Boskin Commission attributed much of their estimated upward bias in the CPI to the index's failure to adequately deal with improvements in product quality over time. (pages 1 - 16)
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A Review of Reviews: Ninety Years of Professional Thinking About the Consumer Price Index - Marshall Reinsdorf, Jack E. Triplett
DOI: 10.7208/chicago/9780226148571.003.0002
[Consumer Price Index, CPI, Cost of Living, COLI, price index, index construction, Cost of Goods, COGI]
This chapter provides a detailed history of the evolution of the Consumer Price Index (CPI), and a comprehensive review of the various commissions formed to study it. It reveals the long-standing nature of many CPI issues that are still controversial today. Apart from providing various CPI reviews, the authors present their views on the alternative methodological foundations for a consumer price index and, in particular, debate the merits of the economic or Cost-of-Living Index (COLI) approach versus the Cost-of-Goods Index (COGI). It is found that the COLI approach to CPI index construction is superior to either the COGI or test approaches, but it is also noted that the test approach can be useful on occasion as a supplement to the economic approach to index construction. (pages 17 - 84)
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Apparel Prices 1914–1993 and the Hulten/Bruegel Paradox - Robert J. Gordon
DOI: 10.7208/chicago/9780226148571.003.0003
[Sears catalogue, apparel prices, Consumer Price Index, CPI, matched model, MM, Labor Statistics, BLS, MM index]
This chapter describes the comparison of hedonic and matched-model (MM) indexes for apparel prices in the United States using Sears catalogue data over the period 1914–1993, and compares the resulting indexes with the corresponding Bureau of Labor Statistics (BLS) apparel index over the same period. The research, which is based on roughly 10,000 exact comparisons for the matched-model (MM) index and another 6,500 observations on the prices and quality characteristics of women's dresses, leads to several conclusions and numerous questions for further research. The chapter explains that the Sears MM indexes do not exhibit a consistent negative or positive drift relative to their BLS Consumer Price Index counterparts. It is found that the hedonic price index for women's apparel always increases more rapidly than the corresponding MM index. (pages 85 - 128)
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Reassessing the U.S. Quality Adjustment to Computer Prices - Robert C. Feenstra, Christopher R. Knittel
DOI: 10.7208/chicago/9780226148571.003.0004
[hedonic methods, personal computers, overbuy, price index, durable good, complementary inputs]
This chapter, which provides a new reason for why conventional hedonic methods may overstate the price decline of personal computers, treats computers as a durable good and assumes that, as software changes over time, this influences the efficiency of a computer. Anticipating the future increases in software, purchasers may “overbuy” characteristics, in the sense that the purchased bundle of characteristics is not fully utilized in the first months or year that a computer is owned. The authors develop a model in which the production function for the services of a personal computer depends not only on its vector of characteristics but also on a vector of other (complementary) inputs, and they develop bounds on a constant quality price index that do not depend on being able to observe the vector of complementary inputs. (pages 129 - 160)
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Hedonic Imputation versus Time Dummy Hedonic Indexes - W. Erwin Diewert, Saeed Heravi, Mick Silver
DOI: 10.7208/chicago/9780226148571.003.0005
[direct characteristics method, hedonic imputation method, index number formulae, hedonic regression models, matched model, price index]
This chapter deals with the “direct characteristics method” approach, in which the index change between two periods is computed using separate hedonic functions estimated for each period. It compares this method, which is called the “hedonic imputation method,” to the usual time dummy approach to hedonic regressions, and derives the exact conditions under which the two approaches to hedonic regressions will give the same two main and quite distinct approaches to the measurement of hedonic price indexes: time dummy hedonic indexes and hedonic imputation indexes. The chapter considers both weighted and unweighted hedonic regressions and finds exact algebraic expressions that explain the difference between the hedonic imputation and time dummy hedonic regression models. The weighting is chosen so that we are actually in a matched model situation for the two periods being considered, then the resulting hedonic regression measures of price change resemble standard superlative index number formulae. (pages 161 - 196)
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CPI Bias from Supercenters: Does the BLS Know That Wal-Mart Exists? - Jerry Hausman, Ephraim Leibtag
DOI: 10.7208/chicago/9780226148571.003.0006
[Consumer Price Index, CPI, Labor Statistics, customer service, A.C. Nielsen, inflation]
This chapter focuses on the fact that the Consumer Price Index (CPI) does not compare the prices charged for the same items at different outlets. It describes how the Bureau of Labor Statistics assumes that any price differences can be explained by differences in outlet characteristics valued by consumers, such as locational convenience or customer service. This may result in the failure to incorporate the gains to consumers from the continuing growth in sales at Wal-Mart and other low-price, high-volume superstores. The authors employ the A.C. Nielsen Homescan consumer panel data to identify the price differentials for twenty food product categories between supercenters, mass merchandisers, and club stores (SMCs) and other outlets. These differentials, combined with the SMCs' increasing market share, lead the authors to conclude that CPI food at home inflation is too high by about 0.32–0.42 percentage points annually. (pages 203 - 231)
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Incorporating Financial Services in A Consumer Price Index - Dennis Fixler
DOI: 10.7208/chicago/9780226148571.003.0007
[Consumer Price Index, financial services, Economic Analysis, reference rate, cost model]
This chapter describes a case for including the transactions costs in a Consumer Price Index, and a user cost model for the treatment of financial services, in which the prices of loan and deposit services are represented by the difference between the corresponding interest rates. A risk-free reference rate is also presented. The author constructs various alternative household financial services price indexes using quarterly data from the Bureau of Economic Analysis over the period 1987–2003. There are two controversial components in the author's experimental indexes: the reference rate(s) of return used to calculate the nominal user costs of household bank deposits and household bank loans, and the deflator(s) used to convert nominal financial service flows into real flows. (pages 239 - 272)
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A General Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output - J. Christina Wang, Susanto Basu, John G. Fernald
DOI: 10.7208/chicago/9780226148571.003.0008
[cost price index, Fixler, nominal service flows, nominal asset holdings, screening services, financial services]
This chapter presents a general equilibrium approach to measuring bank output, an approach that turns out to be quite different from Fixler's in some important respects. In contrast to deflating nominal asset holdings by a user cost price index, the chapter suggests that direct measures of the services rendered by consuming financial services be constructed and then the nominal service flows deflated by these direct measures. In resolving this controversy, a detailed model developed by user cost advocates such as Fixler can be compared to a detailed model developed by the authors, and users can decide which framework seems more reasonable. This model assumes that screening services are provided at the beginning of a contractual relationship between banks and borrowers, and it is noted that there is an issue of timing when the flow of services is measured via flows of interest that are observed during the life of the loan. (pages 273 - 320)
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Can A Disease-Based Price Index Improve the Estimation of the Medical Consumer Price Index? - Xue Song, William D. Marder, Robert Houchens, Jonathan E. Conklin, Ralph Bradley
DOI: 10.7208/chicago/9780226148571.003.0009
[Consumer Price Index, CPI, Cost of Goods, disease-based indexes, health care]
This chapter discusses some of the issues involved in implementing the approach of the pricing of medical services. The inclusion of medical care in the chapter highlights the issue of what prices should be used in the Consumer Price Index (CPI). Traditionally, the U.S. CPI collected prices on the goods and services used as inputs to health care—prescription drugs, office visits, surgical procedures etc.—and this appeared to be consistent with a Cost-of-Goods Index framework. It was found that, during the 1990s, a shift was made in the CPI Hospital Services component to pricing patterns of treatment for specific conditions, rather than the individual inputs. Comparing disease-based indexes to indexes simulated using current CPI methodology for New York, Philadelphia, and Boston, the authors suggest that while the disease-based indexes may be superior, given the large standard errors, the differences among indexes were not significantly different in many cases. (pages 329 - 368)
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Price and Real Output Measures for the Education Function of Government Exploratory Estimates for Primary and Secondary Education - Barbara M. Fraumeni, Marshall Reinsdorf, Brooks B. Robinson, Matthew P. Williams
DOI: 10.7208/chicago/9780226148571.003.0010
[price measurement, education services, nonmarket inputs, quality adjustment, annual growth rate, government output]
This chapter describes the extension of price measurement to the difficult area of government-provided education services. These education services are provided without explicit charge to consumers; their production involves significant nonmarket inputs; the contribution of providers is difficult to isolate; and the benefits of education are complex and difficult to value. The authors develop and compare alternative quality-adjusted and unadjusted measures of the price and real output of the U.S. primary and secondary education services, using three dimensions of quality: teaching staff composition, pupil–teacher ratio, and high-school dropout rate. The use of their preferred method of quality adjustment raises the estimated annual growth rate of real output by 0.18 percent for their entire 1980–2001 period of study. This study is part of the ongoing efforts by the Bureau of Economic Analysis to improve the valuation of government output in the U.S. national accounts. (pages 373 - 404)
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Measuring the Output and Prices of the Lottery Sector: An Application of Implicit Expected Utility Theory - Kam Yu
DOI: 10.7208/chicago/9780226148571.003.0011
[gambling, quality, expected utility theory, theoretical complexity, quality adjustment]
This chapter presents a novel approach to pricing gambling services, using data on the Canadian lottery system. The Bureau of Labor Statistics excludes gambling from the scope of the Consumer Price Index, partly because it is difficult to determine exactly the appropriate pricing concept and partly because the complexity of making adjustments for “quality” improvements seems to be incredibly complex. The author describes how the quality adjustment problem arises from the fact that, if a lottery increases the odds of winning the lottery, then it appears that a positive increase in “quality” has occurred. Although classical expected utility theory could be applied to provide answers to this quality adjustment problem, as the author notes, this theory does not work satisfactorily in the gambling context. The author tries to specify an appropriate concept, but its theoretical complexity and empirical volatility may prevent statistical agencies from adopting it. (pages 405 - 428)
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Consumption of Own Production and Cost-of-Living Indexes - T. Peter Hill
DOI: 10.7208/chicago/9780226148571.003.0012
[Consumer Price Index, CPI, households, meals, labor, consumer expenditures]
This chapter discusses one of the aspects of the Consumer Price Index (CPI) scope problem: the implications of expanding coverage of the CPI to include nonmarket household production. The author observes that a major problem with the traditional theory of the CPI is that households do not directly consume most of the goods and services recorded under consumer expenditures. Meals prepared at home are a case in point. The household purchases groceries and combines them with household labor and capital to produce the meals on the table. The chapter signifies that, by implication, the CPI is not an index of the cost of consumption (the usual interpretation), but is instead largely a price index of the intermediate goods used by households to produce consumption goods. It is also observed that the inclusion of household production in the CPI will lead to many imputations in the resulting index. (pages 429 - 444)
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Durables and Owner-Occupied Housing in a Consumer Price Index - W. Erwin Diewert
DOI: 10.7208/chicago/9780226148571.003.0013
[homeownership, Consumer Price Index, costs, price index, user cost, rental equivalence]
This chapter provides a detailed review of alternative treatments of homeownership in a Consumer Price Index, discussing the advantages and disadvantages of several approaches to measuring homeowner costs. These include the acquisition price of housing units, per-period homeowner spending for mortgage interest and other periodic payments, user cost, and rental equivalence. The user cost and rental equivalence techniques are alternative flow-of-services approaches. The chapter records that a major difficulty associated with forming any housing price index is that units are unique and also depreciate over time, making it difficult to construct price indexes using a matched-model methodology. It discusses various methods for overcoming this difficulty. (pages 445 - 506)
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Contributors
Author Index
Subject Index
