TABLE 1 Example 1: UNIVAC and the “New Computer”

 

UNIVAC (1953)

“New Computer” (1955)

Number produced

3

10

Price, each

$400K

$600K

Current price output

$1.2 million

$6.0 million

Performance index

1.0

1.5

Computer inflation (with estimated performance premium = 1 + 0.7(0.5))

1.00

1.11

Computer “constant price” output index

1.00

4.60

economy, that 10 were produced, and that they sold for $600,000 apiece. In the 1955 economy, therefore, the revenue to the producers of computers—or the total amount of computer output, or the total amount of investment in computers, all of these being the same thing—would have been $6.0 million (see Table 1). Having observed such an increase in unit price and growth in output, he said, “The first thing economists will ask is: ‘How much inflation is there in the computer market?’”

Inflation cannot be determined from the above data alone, however: A performance index is necessary in addition so that increase in price can be adjusted for change in performance. Dr. Triplett proposed setting the performance index at 1.0 for UNIVAC and assigning New Computer 1.5 performance units; had the two computers been produced at the same time, he explained, it would have been clear that part of the difference in price between them would have represented a performance premium. “Similarly,” he said, “we don’t want to show ‘$1.2 million to $6 million’ as the change in output if, in fact, the computer in the second period is in some sense more computer than the one in the first period.” To make these adjustments, it is necessary to put a value on the increase in performance from UNIVAC to New Computer.

Better for this purpose than having just UNIVAC and New Computer in production at the same time would be having a number of computers available simultaneously. In that case, Dr. Triplett said, a value could be mathematically ascertained and used to adjust not only the price of New Computer compared to UNIVAC in order to get a measure of inflation, but also the change in the output measure in order to get the change in real output. This could be done with a Hedonic Function:2

(1)

2  

Hedonic price indices are a way to correct deflators for quality changes in the goods they are measured for, using product characteristics such as memory capacity or processor speed (in the case



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