Mike -
...Furthermore, the productivity and growth miracle derived much of its strength from the hedonic deflator and understating price inflation aided by changes in the way the price indices are calculated. ...
Hedonic Measurement Example
In an attempt to find a case where hedonic measurements might make some sense, consider the following -
You are in the market for a new car and make a visit to the local FORD dealership, Harry Hedonic's Auto Emporium.
The first car that catches your interest is a 2000 FORD Futility, a four door gasoline powered sedan with a fuel economy rating of 30 MPG and a price of $20K. Also available is the new 2001 FORD Futurity, a nearly identical model except for a new fusion power engine which requires no fuel, and sells for $25K.
As car sales in 2001 shift over from $20K Futilities to $25K Futurities, what are the effects on CPI and GDP, assuming that the sales volume is constant?
If the 2001 Futurity had no advantages over the 2000 Futility, then the CPI contribution and the GDP contribution would both be 25%, the increase in sales price, year over year.
However, the 2001 Futurity's lack of a fuel requirement is clearly an advantage. The question is how to account for that advantage through hedonics. One way is to calculate the discounted present value of all the projected gasoline purchases needed by the 2000 Futility. If this were to result in a value of exactly $5K, then there would be neither a CPI nor a GDP contribution. If the result were less than $5K, there would be a positive contribution to both CPI and GDP, and vice versa if the result were more than $5K. Note that the GDP would be higher if there weren't an offsetting decrease in retail gasoline sales. (ignoring a time of purchase issue).
To deal with a factory inventory buildup of unassembled 2000 Futilities, FORD reworks them into 2001 FORD Fictions, which differ from 2000 FORD Futilities in only the name and model year and the addition of a FAST FUEL PASS system which electronically charges all gasoline purchases directly to FORD. The 2001 FORD Fiction also has a price of $25K, the same as the 2001 Futurity. How does the effect on CPI and GDP of the Fiction differ from that of the Futurity?
If the discounted present value of the gasoline purchases for the Futility is $5K, the Fiction and the Futurity offer the same value to the customer for the same price, $25K and no fuel purchases required. This means that the CPI contribution for both is zero. However, in the case of the Fiction the gasoline purchases are still required and made, so there does seem to be a GDP contribution. If, on the other hand, the Futility is compared directly to the Fiction, we have identical cars which differ only effectively in that the gasoline purchases are prepaid at the time of purchase, so calling this a GDP increase sounds peculiar.
Any comments?
Regards, Don |
