. "4 Evolving Market Baskets: Adjusting Indexes to Account for Quality Change." At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press, 2002.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
and new goods bias. Furthermore, there is no guarantee that even such “detailed analyses” will produce results that are suitable for inclusion in the CPI.
While the Boskin commission offered no new remedies, it had much to say regarding the magnitude of quality change and new goods effects on the CPI, producing a comprehensive, categorical point estimate. Of the 27 CPI item categories evaluated for quality change by the commission, 8 were assigned a bias of zero; the other 19 were estimated to impart a positive bias on the index.7 Estimates for 6 of the 19 positive bias categories were calculated using a combination of results from existing studies of specific items and inferred figures for similar unresearched items in the category. Two upper-level CPI categories assessed in this way—appliances (including electronic) and medical services—contributed more than half the estimated overall quality bias. The commission performed original research or detailed back-of-the-envelope calculations for 4 categories. For the remaining 9 categories, empirical evidence was unavailable, and a descriptive approach discussing possible bias sources coupled with guesswork had to suffice (Moulton and Moses, 1997:310). (See “Technical Note 1” to this chapter for a review of upper-level item categories that the commission identified as contributing significantly to its overall CPI bias estimate.)
BLS APPROACHES TO QUALITY CHANGE
In constructing its CPI, the BLS has implemented a number of techniques to minimize perceived biases associated with its modified Laspeyres approach. For many decades—starting long before the comparatively recent calls for a cost-of-living index—BLS has been aware of problems posed by items whose quality is changing over time. In general, the agency has appealed to the cost-of-living theory in describing its efforts to confront the issue.
BLS readily acknowledges that, relative to some ideal COLI, introduction of new goods and quality change of existing ones may bias the CPI in two different ways.8 First, there are biases associated with quality changes that are detected in the CPI sample and for which BLS attempts to correct. In this case the question is: “What is the bias, if any, of CPI procedures for handling quality change when quality changes appear on CPI items?” (Triplett, 1997:24). Second, there are
See Boskin et al. (1996) or Gordon and Griliches (1997) for the complete list of estimated bias by category; see Moulton and Moses (1997) for a detailed critique of the estimates.
As noted above, the distinction between a “new good” and a new variety or improved-quality good is arbitrary. In terms of CPI construction, we think of a “new good” as one that would require creation of a new item strata (or entry-level item) and that can only enter the index by initiation of a new item classification structure—the VCR is an example. Quality change refers to evolving characteristics of a good or service already included in the index and whose price can be adjusted to reflect the change at any point—a laptop computer with more memory is an example.