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The Measurement of Durable Goods Prices

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.

Table of Contents

I. Introduction and Methodology
1. Introduction and Summary of Findings
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. Conceptual Issues in the Measurement of Price and Quality Changes
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. The Methodology of Quality Adjustment
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. Commercial Aircraft
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. Electric Utility Generating Equipment
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. Computer Processors and Peripherals
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. Electrical Appliances
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. New and Used Automobiles
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. Other Products
9.1. Introduction
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. Specification Price Indexes from Sears Catalog Data
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. Using Unit Value Indexes to Measure Transaction Prices and Quality Change
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. Weighting the Alternative Data Sources into New Price and Output Measures for Producer and Consumer Durable Equipment
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)


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