Problems of international comparisons of growth caused by dissimilar methods of deflation - with IT equipment in Germany and the United States as a case in point
An important feature of the "new economy" in the United States has been the major surge in macroeco- nomic productivity since the mid-nineties, which has also contributed to correspondingly stronger, tension- free economic growth. By contrast, most of the other industrialised countries did not report a similar "prod- uctivity boom" in the last few years. This discrepancy is largely attributed to the relatively sizeable share of the manufacture of information and communications tech- nology goods and their greater use in the various sec- tors of the US economy.
The figures from the national accounts seem to put Germany, too, far behind the United States in the manufacture and the use of new technologies, particu- larly information processing. If we use as an example investment in IT equipment (excluding purchased and self-produced software) as an indicator of the use of new technologies, for which both countries have offi- cial and relatively comparable information, from 1992 to 1999 real expenditure on IT hardware and equip- ment in the United States (private sector) rose by an average of around 40% per year. 1 By contrast, official statistics put their increase in Germany at only 6%. 2
The discrepancy between the two countries in develop- ments in real IT equipment, however, is overstated due to different methods of measuring the prices of these goods. 3 In the United States, for quite some time now the so-called "hedonic" approach has been used to cal- culate price indices for IT goods (and for other selected goods), particularly in order to take quality changes into account, which is indispensable for reliable price measurement. 4 By contrast, Germany uses more con- ventional methods of evaluating quality changes. They often amount to estimating the monetary value of the quality change on a case-by-case basis according to rules laid down by the Federal Statistical Office. 5 There is ample reason to believe that conventional ap- proaches reach their limits once extremely large quality changes occur which are reflected either not at all or only in part in corresponding price increases or de- creases. In the area of IT goods, a particular hallmark of which has for a long time been rapid and compre- hensive technological progress, they probably tend to lead to quality change, and thus the real price reduc- tion, being understated. The hedonic price measure- ment approach, which is based on econometric methods and raises methodological problems of its own, rests on the basic assumption that different var- ieties of a heterogeneous good can be represented as different combinations of individual and distinctly de- fined product characteristics. In competitive markets, price differences at a given time can be explained by deviations in the characteristics of the different "models" of a good. Thus, hedonic price equations for computers usually contain elements such as the clock rate, RAM and hard disk memory as "explanatory vari- ables".
To approximate the effects of the differences in defla- tion of IT goods between the United States and Ger- many, we begin by calculating the implicit deflators of IT equipment. The result is that according to US statis- tics, between 1991 and 1999 prices for computers and peripherals went down by four-fifths, after adjustment for quality variations, whereas according to German price statistics the decline was "only" one-fifth. In a second step, the nominal expenditure on IT equipment in Germany is adjusted with the corresponding US price deflator. This approach, which is theoretically founded on the "law of one price" for tradable goods, implies that the deviations in price trends between the United States and Germany are solely attributable to the aforementioned methodological differences. In 1998 IT investment in Germany, after adjustment with the US price deflator, was, at an estimated DM 64 bil- lion, more than twice as high as real investment ac- cording to official statistics. In 1999 the discrepancy was even well over 170%. In the years since 1991, on the basis of US prices, real expenditure on IT equip- ment in Germany rose by an annual average of 27 1 2 %, compared with 6% according to the conventional approach.
Adjusting real expenditure on IT equipment in Ger- many in these dimensions would amount to, in math- ematical terms, investment in machinery and equip- ment making a larger contribution to GDP growth and thus also, when seen in isolation, stronger economic growth. The actual size of the "growth effect" of a hedonic price measurement of IT goods in Germany, however, can be estimated only by performing com- prehensive calculations which would also have to take into account the IT goods contained in other demand components.
1 To improve comparability, the information published by the Federal Statistical Office on investment in "office ma- chinery and computers" was adjusted for the (estimated) investment in office machinery. - 2 Information for 1999 is estimated since no such official data for Germany are available yet. - 3 See also: OECD Economic Outlook, No. 67, June 2000, page 182. - 4 The west European coun- tries that also use hedonic price indices to deflate the prices of IT products are France, Sweden and Denmark. See: Scarpetta, S. et al, Economic Growth in the OECD Area: Recent Trends at the Aggregate and Sectoral Level, OECD Economics Department Working Papers, No. 248, June 2000, page 92. - 5 For more details see: Szenzenstein, J., Die Behandlung von Qualitätsänderungen im Preisindex für die Lebenshaltung,in: Deutsche Bundesbank (ed.), Zur Diskussion über den Verbraucherindex als Inflationsindi- kator, Frankfurt, 1999, page 41ff. (available only in German).