quasar
interesting read on our dollar debate (from the mdd thread)
Yardsticks that blur the output picture
by ANDREW SMITHERS
It is widely believed that the US has experienced a productivity miracle that has left the rest of the world behind. Reality may well be very different. The reason lies in the way that output is measured either side of the Atlantic.
In general, the US statisticians use what is known as 'hedonic' pricing and Europeans don't. The difference is startling. The Office for National Statistics has estimated that over the past four years the apparent rise in British industrial output would have been three times the previous estimate had the US system been in place.
Reality, of course, is not changed by the way it is measured, but perceptions certainly are, and US and European statistics give very different impressions about productivity and inflation as well as about output. Although central bankers are well aware of the problem, it is likely, nonetheless, to affect their policies. To those who don't know about it, the impression given is of US success and European failure.
Whether or not hedonic pricing is sound and sensible is the cause of heated arguments. What cannot be doubted is that the use of different systems makes nonsense of the relative measures of growth, productivity and inflation. Either the US is doing less well than the figures suggest or Europe is doing much better.
The US approach makes greater allowance for improvements in quality, but may overdo it. Just because a computer can do more things than before, or do them faster, does not mean people using them will wish to or be able to take advantage of this. Hedonic pricing of computers, which is the big issue, has been likened to saying that a car costing £15,000 which can go at 150 miles an hour has the same value as one costing £5000 with a maximum speed of 50 mph. But of course there is a vast difference between the speed at which cars can go and the one at which they do.
Not making an allowance for the way computers are improving will clearly overstate inflation. Overdoing it will make inflation appear less of a problem than it is. There is a good chance, therefore, the truth lies somewhere in the middle of the Atlantic.
What cannot be doubted is that the relative position of the US and Europe is distorted by the difference in measurement. It follows that there is good chance European monetary policy will tend to be tougher than the one the Fed thinks is right for the US. In normal circumstances, if the ECB's policy was tighter than the Fed's, the euro would tend to strengthen against the dollar. But currency markets may have been even more misled by the data than central bankers.
The perception that Euroland is doing much worse than America seems to have made a contribution to the euro's weakness. As, in reality, the gap is narrower than it appears to be, the difference in measurement may have contributed to the euro's fall being overdone. This may help Euroland. In recessions, countries with undervalued currencies tend to suffer less than others from the fall-off in world trade |
