Prices in Space and Time

National Science Foundation, SES-1122749
Principal Investigator: David Weinstein

Abstract

One of the most important measurement challenges facing macroeconomics, international economics and urban economics concerns how to properly measure aggregate prices when varieties appear and disappear. We have long known that the creation and destruction of products exerts a profound impact on our standard of living. A proper cost-of-living index would measure the expenditure needed to maintain a certain level of utility and therefore should reflect the invention of new (and different) goods even if the new items sell for the same price as existing ones. Statistical agencies around the world, however, compute price indices from formulas that do not capture this effect. This project aims to solve this problem for a substantial share of consumer expenditure. Specifically, this research will obtain the first structural estimate of the impact of variety and quality growth on prices and welfare across a broad range of products. The main objective is to generate a utility-based aggregate price index that can be used as a benchmark to better understand how the US and other countries have benefited from the increase in varieties available to consumers. A major part of this effort includes the use of a new database that provides sub-brand-level data for a large fraction of the goods that comprise the US CPI. The investigators intend to explore these gains along two dimensions. One way in which consumers can increase their choice of goods is through international trade. Trade with other nations allows consumers to choose from a variety of goods that are not available to them domestically. Over the last several decades there is evidence of spectacular growth in the number of traded varieties. The number of varieties imported by the U.S. -defined as the import of a particular 10-digit HTS good from a particular exporting country - has risen by a factor of four. Furthermore, preliminary results for a wider range of countries suggest enormous growth in imported varieties among fast growing and liberalizing countries. This explosion in traded varieties raises two important questions that the investigators seek to answer: 1) How much do conventional import price indexes around the world overstate import price inflation by not taking new goods and varieties into account? and 2) What are the world gains from trade from the growth in imported varieties? A second source of variety growth comes from the increase of domestic varieties. This project aims to compute a variety adjusted aggregate price index that covers roughly 25 percent of the goods available to US consumers. Using a unique database that gives us access to the whole universe of packaged goods (i.e., over 2 million Universal Product Code goods), the investigators will describe the extent of product creation and destruction at the product level on an annual or quarterly frequency. Furthermore, the availability of price and quantity at this level of aggregation will allow the investigators to calculate the price and welfare impact of new domestic varieties.

Broader Impacts: The investigators intend to disseminate the results from this research through the publication of articles and the participation in conferences. In addition, the investigators will make available a dataset with elasticities of substitution as well as supply elasticities available to researchers on a website. The investigators have already had a large number of requests for elasticities from their work on the US and believe that there is enormous interest in these estimates. They intend to make their data and parameter estimates available to future researchers. Third, the investigators have also discovered that there is enormous media interest in understanding the gains from variety and believe that their results are likely to be widely reported. Finally, the investigators plan to work with statistical agencies and monetary authorities to help improve the measurement of prices and formulation of policy. This research will also have a cross-disciplinary/cross-institutional dimension as well. First, some of the work will be performed in cooperation with the Pittsburgh Supercomputing Center. In addition, a part of the research will be conducted at the Federal Reserve Bank of New York. This will aid the bank in its efforts to improve the formation of monetary policy.

http://www.nsf.gov/awardsearch/showAward.do?AwardNumber=1122749