[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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MEASURING THE PRICE AND QUANTITY OF SOFTWARE
Measuring prices might seem easy—just go out to stores
(or log on to e-commerce sites) and record the prices.
Unfortunately, it is not that simple. A price index needs to
measure how the price of an individual good or service changes
over time, and this process is complicated because the quality
of the good or service also can change over time. A car with
air bags may cost more than a car without air bags, but in part
that is because the two cars are not identical. In such a case,
the auto firm’s cost of adding air bags can be used to estimate
how much of the price change is due to quality improvements
(the addition of the air bags) and how much represents a change
in the price of a car. Adjusting for quality changes is a particularly
significant problem with many of the goods and services
associated with the new economy, information technologies,
and e-commerce.
Software provides an interesting case in point. Anyone
who has used software for a number of years knows that
today’s programs have been improved in countless ways
over the programs of the past. Word-processing software
purchased for $100 today has many more features than a
word-processing program purchased for $350 in 1985. A
price index for software has to correct for these changes
in quality.
The Bureau of Economic Analysis at the Department of
Commerce tries to adjust for quality changes when it calculates
its price index for software, but it does so only for prepackaged
software, the type you might buy at the campus bookstore.
Other types of software are treated differently. Many
businesses develop specialized software for their own uses
(called business own-account software), and the bureau bases
the price index for this class of software on the cost of producing
it. So if it costs the same to write a program today as
it did ten years ago, the bureau assumes that the programs
are of equal quality. But this is unlikely—a programmer today
can write in one hour a program that does what was impossible
ten years ago. Finally, the price of a third class of software—called
custom software—is based on an average of the
prices for business own-account software and prepackaged
software. The price of prepackaged software gets a weight of
25 percent, with business own-account software prices receiving
a weight of 75 percent. Like the treatment of business ownaccount
software, this method is likely to underestimate the
quality improvements in custom software, and therefore to
overestimate the price index for constant-quality software.
The Bureau of Economic Analysis takes this approach because,
unfortunately, the detailed information needed to develop
better measures of software prices and changes in the quality
of software is not available.
SOURCE: Dale W. Jorgenson and Kevin J. Stiroh, “Raising the Speed Limit: U.S.
Economic Growth in the Information Age,” Brookings Papers on Economic Activity
2000, 1 (2000): 61–211.
In Chapter 22 we observed that real GDP is nominal GDP adjusted for the price
level. The price index we used for calculating real GDP is called the GDP deflator.
It represents a comparison between what it would cost to buy the total mix of goods
and services produced within the country today and what it cost in a base year. In
other words, the GDP deflator is a weighted average of the prices of different goods
and services, where the weights represent the importance of the goods and
services in GDP.
The goods and services whose prices go into the GDP deflator are different from
those that go into the CPI. For example, households do not purchase Boeing 747s, so
their price is not included in calculating the CPI, but the United States produces
these planes, so their price is included when we calculate the GDP deflator. Households
518 ∂ CHAPTER 23 THE COST OF LIVING AND INFLATION