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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
Estimates of “quality bias” in the CPI, such as those of the Boskin commission, that combine specific case studies with subjective extensions to the universe of consumer goods, can contribute to informed discussion about the problem. But, as producers of official statistics, the BLS must walk a difficult line: It must seek to develop and apply techniques for measuring quality change, but it also has to recognize that there are substantial conceptual, statistical, and data availability problems to be solved before it can produce careful and replicable estimates that will be widely accepted.
The adjustment of observed price changes, to eliminate those that reflect changes in the quality of the goods purchased, raises conceptual and measurement issues. Even if there are no measurement problems, one would still have to decide how comprehensively the BLS should pursue the goal of quality adjustment. A frequently cited example arises from improvements in specific medical procedures that reduce mortality. Intuitively, many people think it would be inappropriate to adjust the CPI for such quality improvements and thereby reduce the benefits paid to social security recipients to reflect the estimated monetary value of additional longevity resulting from improved medical procedures (recipients should not be put in the position of living a longer life and enjoying it less). Is there a theoretical foundation for this view? Is it exceptional to this particular issue? Are there grounds for establishing limits on the use of quality adjustments? Are there general principles that can be invoked, or is this the kind of issue that must be settled on a case-by-case basis? In Chapter 2 we consider these issues in general and in Chapter 6 examine the medical care example in more detail.
Occasions for quality adjustment continually arise when field agents find that sample items no longer appear on outlet shelves. In these cases, using guidelines established by BLS commodity analysts, the field agent selects a replacement item (which may or may not be new to the market) that is as similar to the old item as possible. About 30 percent of the items being priced disappear each year. In about two-thirds of those cases the field agent can identify a comparable good, which is then treated as if it were the old item. In the other cases the agent identifies a similar but not completely comparable product—e.g., a different version of a dining room table, a lawnmower with a more powerful engine, or a different model of a computer—to price. A quality adjustment to the price of the replacement item must then be made.
Adjustment for differences between the old and the replacement items proceeds along one of two paths. Explicit quality adjustments are currently carried out using either a cost-based method or a hedonic regression technique. For instance, for three decades the BLS has estimated quality adjustments for the annual model changeover in motor vehicles using the cost-based method. The