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To: LLCF who wrote (23793)	10/2/2000 9:50:16 PM
From: patron_anejo_por_favor	Respond to of 436258

Nice take by Dr. Kurt Richebacher on why hedonic adjustments matter: prudentbear.com The ugly truth seems to be that, whatever positive happens in the euro-zone, the U.S. economy is going to slow down, it is now widely believed that it will be capable of growing just as fast as the economy of the zone at the top of the business cycle. Likewise, few people noted that the Bundesbank had explicitly pointed out for the first time that comparisons of economic growth between the United States and Germany were grossly distorted by the so-called hedonic price adjustments, used in the U.S. statistics to measure increases in computer power. Had the German statisticians applied the U.S. methods for deflating IT equipment, according to the Bundesbank, real IT investment in Germany in 1998 would have been DM 64 billion, that is, twice as high as reported. In 1999, the difference would have risen to 170%. According to the measurement practices in the German GDP statistics, computer prices have fallen by 20% altogether since 1991. By the measurement practices in the United Sates, they have fallen 26% a year for the past five years. Official statistics for the United States show an average annual increase in business expenditures on computer equipment per year by 40% since 1991, as against only 6% in Germany. Using, the American deflator, however, the average annual increase would have been 27.5% for the whole period. As the divergence in the deflators is rapidly compounding over time, the divergence in measured output follows suit. Numbers get more and more absurd. Just think of what we mentioned earlier: fixed nonresidential investment, of which 75% is "hedonised" new high tech, have accounted for 55% of U.S. real GDP growth in the first half of 2000. In other words, the hedonic deflator has come to represent the most powerful factor behind the seemingly miraculous growth of U.S. GDP and productivity. In reality, hedonic price indexing corrupts the U.S. economic statistics in two ways. Gross overstatement of apparent faxed investment, GDP and productivity growth is the most obvious part. The other part is understatement of apparent inflation rates. In a recent report, the Commerce Department said that the falling prices for electronic and computer equipment have pulled down inflation rates by half a percentage point a year. Got Euros?