Should we adjust input prices for quality changes?

Article type: Research Article

Authors: Durand, René^a

Affiliations: [a] 325 St-Raymond, Gatineau, Québec, Canada, J9A 1X3. Tel.: +18195954656; E-mail: [email protected]

Abstract: "The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment. That is to say, the real wage of an employed person is that which is just sufficient (in the estimation of the employed persons themselves) to induce the volume of labour actually employed to be forthcoming;" (John Maynard Keynes [10, p.5]. It is current practice in many statistical offices around the world to adjust price indices for quality changes over time in sampled items. This paper reviews briefly how these adjustments are done showing that they amount to changing quantity measurement units. It argues that quantity units must be chosen so that they leave households indifferent between old and new units of outputs (based on their utility) and old and new units of non-produced inputs (based on their disutility). Produced inputs prices, such as computer prices, are adjusted based on measured changes in their utility/productivity rather than based on their costs/disutility. Is that the correct solution?

DOI: 10.3233/JEM-2007-0272

Journal: Journal of Economic and Social Measurement, vol. 32, no. 1, pp. 1-14, 2007