Working Paper: CEPR ID: DP13445
Authors: Ian Crawford; Peter Neary
Abstract: Changes in product characteristics on the extensive margin are an important and hitherto neglected dimension of quality change. Standard techniques for quality-adjusting price indices cannot handle such changes satisfactorily, which leads to an economically and statistically significant bias in the measurement of prices and real output. We combine theoretical insights from index numbers and demand for characteristics to develop a new method for incorporating changes on the extensive characteristic margin. Applied to data on new car sales in the U.K., our method leads to revisions in estimated inflation rates for this commodity group that are both plausible and quantitatively important.
Keywords: extensive and intensive margins of consumption; characteristics model; quality change; Sato-Vartia-Feenstra index numbers
JEL Codes: C90; C91; C92; D03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| New characteristics (O39) | Measurement of inflation rates (E31) |
| Failing to adjust price indices for new goods and quality improvements (C43) | Overestimation of the rate of inflation (E31) |
| Neglecting changes in product characteristics (L15) | Systematic bias in price measurements (P22) |
| Changes in product attributes (L15) | Influence on economic welfare and price indices (E31) |
| New method incorporating changes on the extensive margin (C51) | Revisions in estimated inflation rates for new car sales in the UK (E31) |
| New method (C69) | More accurate reflection of inflation rates (E31) |
| New method could account for additional half of previously estimated bias in inflation (C43) | Reduction in estimated bias in inflation (E31) |