Working Paper: NBER ID: w4841
Authors: Robert C. Feenstra; Clinton R. Shiells
Abstract: The purpose of the paper is to measure the potential bias in the U.S. import price index due to the appearance of new product varieties, or new foreign suppliers, and determine the effect of this bias on the estimated income elasticity of import demand. Existing import price indexes are based on a sample of products from importing firms. We argue that if the share of import expenditure on the sampled products is falling over time, this will lead to an upward bias in the measured index. Using a correction based on the falling expenditure share on sampled countries, we find that the income elasticity of aggregate U.S. import demand is reduced from 2.5 to 1.7, or about halfway to unity. Our estimates suggest that the aggregate import price index is upward biased by about one and one-half percentage points annually.
Keywords: import price index; income elasticity; international trade
JEL Codes: F10; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| New product varieties or new foreign suppliers (L15) | Upward bias in the measured import price index (C43) |
| Upward bias in the measured import price index (C43) | Overestimation of the income elasticity of aggregate US import demand (F14) |
| Falling share of import expenditure on sampled products (F14) | Upward bias in the measured import price index (C43) |
| Upward bias in the measured import price index (C43) | Bias in the income elasticity of import demand (F61) |