. "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
both theoretical work and practical construction issues. The tendency to emphasize what can be most easily measured, rather than to focus on learning what characteristics are important to consumers, should be resisted. No research program can identify a universal set of criteria against which the BLS can validate its econometric procedures—there will always be a role for detailed case-by-case study. But precisely because so much judgment and knowledge of the product is involved, it makes sense to have outside review before new hedonic applications are brought into the CPI.
TECHNICAL NOTE 1: BOSKIN COMMISSION ESTIMATES OF QUALITY CHANGE AND NEW GOODS BIAS
In this note we briefly review the items, grouped into upper-level categories, that the Boskin commission identified as contributing significantly to its overall CPI bias estimate. We also make note of criticisms of commission methods by Moulton and Moses (1997) to illustrate the lack of consensus that exists regarding the magnitude of quality change and new goods biases—particularly at the level of disaggregated CPI component indexes.
Food and Beverages The estimated bias associated with CPI pricing of fresh fruit and vegetables was the largest among components of the food and beverages category and was attributed by the commission primarily to the value to consumers of increased seasonal availability and variety. Limited by the dearth of published evidence on items in the food category, the commission was forced to lean heavily on Hausman’s (1997) work that calculated consumer surplus for a new variety of breakfast cereal as a means to quantitatively estimate the value consumers place on increased product variety. Citing data showing increased total consumption of products within the category, which they linked to increased variety and convenience, the commission arrived at an annual bias estimate of 0.6 percent for fresh fruit and vegetables. Moulton and Moses (1997) challenged this figure, showing that most of the increase in consumption over the period 1972-1995 occurred after 1985, while most of the increase in availability occurred before 1985: “Part of the increase appears to have been driven by shifts in preferences, perhaps as a response to improved knowledge about the health benefits of fresh vegetables” (Moulton and Moses, 1997:314).
Shelter The Boskin commission produced detailed back-of-the-envelope calculations, based on assumptions about rental unit quality and size, to estimate a 0.25 percent annual bias for the shelter cost index. The commission’s position that CPI quality adjustments have been inadequate for shelter was deduced from the premise that newer apartments have increased significantly in quality (as reflected by improved amenities, such as central air conditioning) and in size (a