The Measurement of Durable Goods Prices
by Robert J. Gordon
University of Chicago Press, 1990
Cloth: 978-0-226-30455-7 | Electronic: 978-0-226-30460-1


American business has recently been under fire, charged with inflated pricing and an inability to compete in the international marketplace. However, the evidence presented in this volume shows that the business community has been unfairly maligned—official measures of inflation and the standard of living have failed to account for progress in the quality of business equipment and consumer goods. Businesses have actually achieved higher productivity at lower prices, and new goods are lighter, faster, more energy efficient, and more reliable than their predecessors.

Robert J. Gordon has written the first full-scale work to treat the extent of quality changes over the entire range of durable goods, from autos to aircraft, computers to compressors, from televisions to tractors. He combines and extends existing methods of measurement, drawing data from industry sources, Consumer Reports, and the venerable Sears catalog.

Beyond his important finding that the American economy is more sound than officially recognized, Gordon provides a wealth of anecdotes tracing the postwar history of technological progress. Bolstering his argument that improved quality must be accurately measured, Gordon notes, for example, that today's mid-range personal computers outperform the multimillion-dollar mainframes of the 1970s. This remarkable book will be essential reading for economists and those in the business community.


Robert J. Gordon is the Stanley G. Harris Professor in the social sciences at Northwestern University. He is the editor of The American Business Cycle: Continuity and Change and Milton Friedman's Monetary Framework.



I. Introduction and Methodology

1.1 Introduction: Purpose of the Project and Statement of Main Result

1.2 The Importance of Accurate Price Measures

1.3 The Scope of This Study

1.4 Summary of the Results

1.5 What Is Wrong with the PPI?

1.6 Qualifications to the Findings

2.1 Introduction

2.2 The Input Price Index

2.3 Measuring the Input Price Index When Quality Change Is Nonproportional

2.4 The Output Price Index

2.5 The Equivalence of Input and Output Price Indexes

2.6 Comparison with Previous Approaches to the Quality Adjustment Issue

2.7 A Model Incorporating Operating Costs

2.8 Adapting the Input Price Index to Incorporate Nonproportional Changes in Net Revenue

2.9 Implementation of Operating Cost Adjustments

2.10 Used Asset Prices and the Accuracy of Quality Adjustments

2.11 Interpretation of the Proposed Conceptual Framework

2.12 Summary and Conclusion

3.1 Introduction

3.2 Official Price Indexes: Coverage and Procedures

3.3 Methodology of Quality Adjustment in the BLS Indexes

3.4 The Hedonic Regression Technique: Basic Features

3.5 The Hedonic Regression Technique: Pitfalls

3.6 Relative Advantages of the Hedonic and Conventional Methods

3.7 Implementation of Quality Adjustments for Changes in Operating Efficiency

3.8 Comparison of "Closely Similar" Models

3.9 Summary and Conclusion

II. Studies of Individual Products

4.1 Introduction

4.2 Postwar Performance of the Airline Industry

4.3 Index of Sale Prices of Identical Models

4.4 Price Changes and Quality Improvements for Particular Models

4.5 Quality Adjustments Based on Net Revenue Data

4.6 Used Aircraft Prices and Pairwise Model Quality Comparisons

4.7 Price Indexes Adjusted for Changes in Operating Efficiency

4.8 Conclusion

5.1 Introduction

5.2 The Technology of Electricity Generation

5.3 Postwar Performance of the Electric Utility Industry

5.4 Characteristics of the Sample of Generating Plants

5.5 Hedonic Price Regressions for Equipment Cost

5.6 Price Indexes Implied by Hedonic Regression Equations

5.7 Adjusting for Changes in Operating Cost

5.8 The Impact of Environmental Legislation

5.9 Conclusions and Topics for Further Research

6.1 Introduction

6.2 The Postwar Development of the Computer Industry

6.3 Implementation of the Hedonic Regression Methodology

6.4 The Data

6.5 Regression Results

6.6 The New Processor Price Index and Its Interpretation

6.7 Peripherals and Weighting Issues

6.8 Price Indexes for Personal Computers: A Pilot Study

6.9 Conclusion

7.1 Introduction

7.2 The Postwar Development of the Appliance Industry

7.3 Data Sources: The Sears Catalog and CR

7.4 Common Features of the Hedonic Regression Equations

7.5 Household Refrigerators and Refrigerator-Freezers

7.6 Room Air Conditioners

7.7 Washing Machines

7.8 Clothes Dryers

7.9 TV Sets

7.10 Other Products

7.11 Overall Price Indexes and Conclusion

8.1 Introduction

8.2 Issues That Arise in Estimating Hedonic Regressions for Automobiles

8.3 Data Used in the Hedonic Regression Study

8.4 Regression Estimates for New Cars

8.5 Hedonic Regression Estimates for Used Cars

8.6 Changes in Quality Mandated by Safety and Environmental Regulations

8.7 Fuel Economy

8.8 Discounting, Premia, and the "Transaction Price Proxy"

8.9 The "Final Alternative" Index

8.10 Comparisons of "Closely Similar" Models

8.11 Conclusion

9.2 Tractors

9.3 Telephone Transmission and Switching Apparatus

9.4 Other Types of Communication Equipment

9.5 Railroad Equipment

9.6 Conclusion

III. Sources for the Pricing of Numerous Products

10.1 Introduction

10.2 The Colorful History of the Sears Catalog

10.3 Catalog Price Indexes: Advantages and Disadvantages

10.4 Catalog Price Index Methodology

10.5 Office, Computing, and Accounting Machinery

10.6 Communication Equipment

10.7 Fabricated Metal Products

10.8 Engines and Turbines

10.9 Metalworking Machinery

10.10 General Industrial Equipment

10.11 Electrical Transmission, Distribution, and Industrial Equipment

10.12 Furniture and Fixtures

10.13 Agricultural Machinery (Including Garden Tractors and Excluding Farm Tractors)

10.14 Construction Machinery (Except Tractors)

10.15 Service-Industry Machinery and Electrical Equipment, n.e.c.

10.16 Behavior of the Average Sears/PPI Ratio

10.17 Conclusion

11.1 Introduction

11.2 Background of the Transaction Price Issue

11.3 Conceptual Problems in the Use of Census Unit Values

11.4 Characteristics of the Data and Calculation of Indexes

11.5 Tests of Cyclical Behavior

11.6 Secular Drift in the Unit Value Ratios

11.7 Concluding Evaluation of Unit Value Indexes

IV. Weighting Issues and Final Results

12.1 Introduction

12.2 Coverage of the Study

12.3 The Overall Drift of the Alternative/Official Price Ratios

12.4 Time Series for the New PDE Deflator and Associated Real PDE Investment

12.5 Investment/GNP and Capital Stock/GNP Ratios

12.6 Alternative Deflators for Expenditures on Consumer Durable Goods

12.7 Implications for Shares of GNP and Sources of Growth

12.8 Conclusion

Appendix A. Producer Price Indexes and Weights for Deflating Producers' Durable Equipment in the NIPA, 1967 and Earlier Years

Appendix B (Tables B.1–B.17). Detailed Product-by-Product Annual Listing of Alternative and Official Price Indexes (1972 = 1.00)

Appendix C (Tables C.1–C.6). "Secondary" PDE Categories, Annual Listing of Alternative and Official Price Indexes (1972 = 1.00)