IMPROVEMENT IN QUALITY DRIVES ECONOMIC GROWTH
March 14, 2005
Much economic growth occurs through improvement in quality, as new models of consumer goods replace older, inferior models. This type of growth is hard to measure and not reflected in official statistics. A new paper from the National Bureau of Economic Research examines just what are the effects of product improvement.
The author notes that the Bureau of Labor Statistics (BLS) does try to determine the product improvement effect in economic growth. However, he believes the BLS misses the mark. Using data from the consumer price index (CPI), the author finds:
- The BLS assumes that quality growth in goods can be as much as one percent.
- The author estimate that quality growth has been understated by 3 percent per year for the past 15 years.
- This suggest that the actual growth rate was at least 5.8 percent per year, even with computers excluded.
The paper argues that the BLS ignores automatic upgrades in quality as consumers buy current goods. For example, the 2005 Ford Explorer is superior to the 1995 Ford Explorer because of increases in technology and market research. Consequently, it costs more. If someone replaces their Ford Explorer, they must spend more money. The BLS measures this as a price increase in the Ford Explorer, instead of a quality growth effect.
These differences in measurement have significant effects. In 1996, the Boskin Commission Report suggested that BLS overstates inflation by one percent a year -- with unmeasured growth in the quality of goods the most important component of that overstatement.
Source: Les Picker, "Measuring the Growth from Better and Better Goods," National Bureau of Economic Research, NBER Digest, January 2005; based upon: Mark Bils, "Measuring the Growth from Better and Better Goods," National Bureau of Economic Research, Working Paper No. 10606, July 2004.
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