Hedonic Indexing

Doug Henwood dhenwood at panix.com
Mon Sep 9 09:15:24 PDT 2002


Alexander Nekvasil wrote:


>in Austrian journals there is this econ guru from
>St. Gallen management school, Friedmund Malik, who, in a
>series of articles, makes one gloomy forecast for the US
>economy after the other. One of his recent pieces was
>about hedonic indexing, a device used by US
>statisticians which values goods not at their price, but
>at price times a factor that supposedly makes up for the
>value losses due to rapid innovation, most notably in
>computer equipment. Malik argues that hedonic indexing,
>although maybe statistically sound, is economically
>wrong, touching on the fraudulous, yet this is how US
>GDP and growth figures are calculated, all of which are
>thusly inflated.
>
>Maybe some of the initiated want to comment on that?

Is this "Austrian" as in Hayekian econ, or as in the country where Vienna is located?

Anyway, hedonic pricing attempts to measure the "real" use-value of a commodity by taking statistical measure of its features. With computers, the hedonic index is constructed by equations capturing improvements in processor speed, disk storage, etc. The bottom line is that today's $2,000 computer may be twice as useful as a $2,000 computer from two years ago even though the price is unchanged. It's a defensible activity, but many devils reside in the details. If you're typing a letter or doing email, is today's computer really twice as good as 2000's? Hard to say.

But the U.S. uses hedonic pricing and most other countries don't. If GDP and other stats were computed using comparable techniques, the U.S. growth advantage during the boom years would narrow but not disappear.

Doug



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