Producer Price Index Manual: Theory and Practice ... - METAC

7. Treatment of Quality Change
approach. The hedonic dummy variable index fell
by about 90 percent from 1972–1984, about the
same as for the matched models approach where
missing prices for new or discontinued products
were derived from a hedonic regression. However,
when using a chained matched models approach
with no estimates or imputations for missing
prices, the index fell by 67 percent. It is also possible
to combine methods; de Haan (2003) used
matched data when available and the time dummy
only for unmatched data—his double imputation
method.
H. Long-Run and Short-Run
Comparisons
7.199 This section outlines a formula to help
quality adjustment. The procedure can be used
with all of the methods outlined in Sections D and
E. Its innovation arises from a possible concern
with the long-run nature of the quality-adjusted
price comparisons being undertaken. In the example
in Table 7.2 prices in March were compared
with those in January. Assumptions of similar
price changes are required by the imputation
method to hold over this period for long-run imputations.
This gives rise to increasing concern when
price comparisons continue over longer periods,
such as between January and October, January and
November, and January and December, and even
subsequently. In this section, a short-run formulation
outlined in Sections C.3.3 and D.2 is more
formally considered to help alleviate such concerns.
Consider Table 7.5, which, for simplicity,
has a single product A that exists throughout the
period, a product B that is permanently missing in
April, and a possible replacement C in April.
Table 7.5. Example of Long-Run and Short-Run Comparisons
Item January February March April May June
Comparable
replacement
A 2 2 2 2 2 2
B 3 3 4 n/a n/a n/a
C n/a n/a n/a 6 7 8
Total 5 5 6 8 9 10
Explicit adjustment
A 2 2 2 2 2 2
B 3 3 4 5/6 x 6=5 5/6 x 7=5.8 5/6x8= 6.67
C 6/5 x 3=3.60 n/a n/a 6 7 8
Total 5 5 6 8 9 10
Overlap
A 2 2 2 2 2 2
B 3 3 4 6 x 4/5=4.8 n/a n/a
C n/a n/a 5 6 7 8
Total 5 5 6 6.8
Imputation
A 2 2 2.5 3.5 4 5
B 3 3 4 3.5/2.5 x 4= 5.6 4/3.5 x 5.6=6.4 5/4 x 6.4=8
Total 5 5 6.5 9.1 8.4 13
Figures in bold are estimated quality-adjusted prices described in the text.
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