At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes

349 Pages·2002·6.2 MB·English

by  National Research Council

A W P
t hat rice?
Conceptualizing and Measuring
Cost-of-Living and Price Indexes
Panel on Conceptual, Measurement, and Other Statistical Issues
in Developing Cost-of-Living Indexes
Charles L. Schultze and Christopher Mackie, Editors
Committee on National Statistics
Division of Behavioral and Social Sciences and Education
National Research Council
NATIONAL ACADEMY PRESS
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NOTICE: The project that is the subject of this report was approved by the Governing Board of the
National Research Council, whose members are drawn from the councils of the National Academy of
Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the
committee responsible for the report were chosen for their special competences and with regard for
appropriate balance.
This study was supported by Contract No. J-9-J-8-0039 between the National Academy of Sciences
and the Bureau of Labor Statistics. Support of the work of the Committee on National Statistics is
provided by a consortium of federal agencies through a grant from the National Science Foundation
(Number SBR-9709489). Any opinions, findings, conclusions, or recommendations expressed in this
publication are those of the author(s) and do not necessarily reflect the views of the organizations or
agencies that provided support for the project.
Library of Congress Cataloging-in-Publication Data
At what price? : conceptualizing and measuring cost-of-living and price
indexes / Panel on Conceptual, Measurement, and Other Statistical Issues
in Developing Cost-of-Living Indexes ; Charles L. Schultze and
Christopher Mackie, editors.
p. cm.
“Committee on National Statistics, Division of Behavioral and Social
Sciences and Education.”
Includes bibliographical references and index.
ISBN 0-309-07442-8 (hardcover)
1. Consumer price indexes—United States. 2. Cost and standard of
living—United States—Statistical methods. 3. Prices—United
States—Statistical methods. 4. Economic indicators—United States. 5.
Index numbers (Economics) I. Schultze, Charles L. II. Mackie,
Christopher D. III. National Research Council (U.S.). Panel on
Conceptual, Measurement, and Other Statistical Issues in Developing
Cost-of-Living Indexes.
HB235.U6 A86 2002
338.5′28′0973—dc21
2001007411
Additional copies of this report are available from the National Academy Press, 2101 Constitution
Avenue, NW, Lockbox 285, Washington, DC 20055; [phone] or [phone] (in the
Washington metropolitan area); Internet, http://www.nap.edu
Printed in the United States of America
Copyright 2002 by the National Academy of Sciences. All rights reserved.
Suggested citation: National Research Council. (2002). At What Price? Conceptualizing and Measur-
ing Cost-of-Living and Price Indexes. Panel on Conceptual, Measurement, and Other Statistical
Issues in Developing Cost-of-Living Indexes, Charles L. Schultze and Christopher Mackie, Editors.
Committee on National Statistics, Division of Behavioral and Social Sciences and Education. Wash-
ington, DC: National Academy Press.
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PANEL ON CONCEPTUAL, MEASUREMENT, AND
OTHER STATISTICAL ISSUES IN
DEVELOPING COST-OF-LIVING INDEXES
CHARLES L. SCHULTZE (Chair), Brookings Institution, Washington, DC
ERNST R. BERNDT, Sloan School of Management, Massachusetts Institute of
Technology
ANGUS DEATON, Woodrow Wilson School, Princeton University
ERWIN DIEWERT, Department of Economics, University of British Columbia
CLAUDIA D. GOLDIN, Department of Economics, Harvard University
ZVI GRILICHES,* Department of Economics, Harvard University
CHRISTOPHER JENCKS, John F. Kennedy School of Government, Harvard
University
ALBERT MADANSKY, Graduate School of Business, University of Chicago
VAN DOORN OOMS, Committee for Economic Development,
Washington, DC
ROBERT A. POLLAK, John M. Olin School of Business, Washington
University, St. Louis
RICHARD L. SCHMALENSEE, Sloan School of Management, Massachusetts
Institute of Technology
NORBERT SCHWARZ, Institute for Social Research, University of Michigan
KIRK WOLTER, National Opinion Research Center, Chicago
CHRISTOPHER MACKIE, Study Director
CONSTANCE F. CITRO, Senior Program Officer
MICHAEL SIRI, Project Assistant
*Died 1999.
v
COMMITTEE ON NATIONAL STATISTICS
2001
JOHN E. ROLPH (Chair), Marshall School of Business, University of
Southern California
JOSEPH G. ALTONJI, Department of Economics, Northwestern University
LAWRENCE D. BROWN, Department of Statistics, University of
Pennsylvania
JULIE DAVANZO, RAND, Santa Monica, California
ROBERT M. GROVES, Joint Program in Survey Methodology, University of
Maryland, College Park
JOEL HOROWITZ, Department of Economics, University of Iowa
HERMANN HABERMANN, Statistics Division, United Nations
WILLIAM KALSBEEK, Department of Biostatistics, University of North
Carolina
RODERICK J.A. LITTLE, School of Public Health, University of Michigan
THOMAS A. LOUIS, RAND, Arlington, VA
DARYL PREGIBON, AT&T Laboratories-Research, Florham Park, NJ
FRANCISCO J. SAMANIEGO, Division of Statistics, University of California,
Davis
RICHARD L. SCHMALENSEE, Sloan School of Management, Massachusetts
Institute of Technology
MATTHEW D. SHAPIRO, Department of Economics, University of Michigan
ANDREW A. WHITE, Director
vi
Acknowledgments
T
he panel’s report is the result of the efforts of many people. The project
was sponsored by the Bureau of Labor Statistics (BLS) of the U.S. De-
partment of Labor and also, in part, by the many federal agencies that
support the Committee on National Statistics through the National Science Foun-
dation. Throughout the study, the panel received unflagging cooperation from the
dedicated staff of BLS. In particular Dennis Fixler (now with the Bureau of
Economic Analysis, BEA) and John Greenlees gave generously of their time to
educate the panel about the methodology and procedures of the Consumer Price
Index. Former Commissioner Katharine Abraham, Mary McCarthy, Charles
Mason, Ken Dalton, Dan Ginsburg, Walter Lane, Sylvia Leaver, and Paul Liegey
attended meetings, gave briefings, or prepared research materials for the panel.
The panel is also indebted to others who made presentations on data and
methodological issues, thereby helping us to develop a broad-based understand-
ing of elements that go into the making of price and cost-of-living indexes: David
Cutler, Harvard; John Astin, Eurostat; William Nordhaus, Yale; Alan Blinder,
Princeton; and Ariel Pakes, Harvard, all served in this capacity. Others, including
Kathleen Scholl, U.S. General Accounting Office; Mick Silver, Cardiff Univer-
sity; Tom Palley, AFL-CIO; and Joe Newhouse, Harvard, supplied the panel with
helpful information and suggestions. We offer special thanks to Jack Triplett,
formerly of BEA and BLS, for attending early meetings and using his long
experience and deep knowledge of the major issues to help us get started and plot
our course.
No panel with a task as difficult as ours could perform its duties without an
excellent and well-managed staff: Andy White, director of the Committee on
vii
viii ACKNOWLEDGMENTS
National Statistics (CNSTAT) was responsible for seeing that this was the case.
Miron Straf, the former director, was instrumental in developing the study. Project
assistants Joshua Dick, Julia Kisa, and Michael Siri provided excellent adminis-
trative assistance. Constance Citro, senior project officer, provided experienced
and wise counsel throughout the life of the panel. The report also benefitted
substantially from the work of Eugenia Grohman, associate director for reports in
the Division of Behavioral and Social Sciences and Education, who was respon-
sible for editing the report and who also made valuable suggestions about its
structure. We thank her for this and also for her role in overseeing the review
process.
The panel owes an especial debt of gratitude to Christopher Mackie,
CNSTAT study director for the project. He quickly absorbed the relevant profes-
sional literature and steeped himself in the issues. He helped organize our work,
coordinated and provided insightful comments on papers and drafts covering a
wide range of topics, contributed to our substantive discussions, drafted impor-
tant parts of the report in cooperation with various panel members, and shepherded
the report through the review process.
This report has been reviewed in draft form by individuals chosen for their
diverse perspectives and technical expertise, in accordance with procedures ap-
proved by the Report Review Committee of the National Research Council
(NRC). The purpose of this independent review is to provide candid and critical
comments that will assist the institution in making the published report as sound
as possible and to ensure that the report meets institutional standards for objectiv-
ity, evidence, and responsiveness to the study charge. The review comments and
draft manuscript remain confidential to protect the integrity of the deliberative
process.
We thank the following individuals for their participation in the review of
this report: Ellen R. Dulberger, Business Strategy, IBM Global Services, Somers,
NY; Charles Engel, Department of Economics, University of Wisconsin; Robert
Feenstra, Department of Economics, University of California, Davis; Ariel Pakes,
Department of Economics, Harvard University; Marshall Reinsdorf, Bureau of
Economic Analysis, U.S. Department of Commerce; Matthew D. Shapiro, De-
partment of Economics and Survey Research Center, University of Michigan;
and Richard Valliant, Westat, Rockville, MD.
Although the reviewers listed above have provided many constructive com-
ments and suggestions, they were not asked to endorse the conclusions or recom-
mendations; nor did they see the final draft of the report before its release. The
review of this report was overseen by John Geweke, Department of Economics,
University of Iowa, and Christopher Sims, Department of Economics, Princeton
University. Appointed by the NRC, they were responsible for making certain that
an independent examination of this report was carried out in accordance with
institutional procedures and that all review comments were carefully considered.
ACKNOWLEDGMENTS ix
Responsibility for the final content of this report rests entirely with the authoring
panel and the institution.
This report reflects the collective expertise and commitment of the indi-
vidual members of the panel. All participated in the panel’s many meetings and
discussions and in the drafting and reviewing of sections of the report. Each
member brought a critical perspective and I thank them for their hard work and
dedication to service for public benefit. Finally, the substance of this report and
its many antecedents owe much to Zvi Griliches. He was a prominent contributor
to the literature on many of the issues with which the panel wrestled, and he
pioneered in exploring ways to deal with the thorniest issue of all, the problem of
quality change. Zvi was a member of the panel but died November 4, 1999,
shortly after the group began deliberations. I speak for the entire panel in saluting
his monumental contributions in this area. We will miss him.
Charles L. Schultze, Chair
Panel on Conceptual, Measurement, and
Other Statistical Issues in Developing
Cost-of-Living Indexes