Sourcing Substitution and Related Price Index Biases

56 Pages Posted: 15 Nov 2014

See all articles by Alice Orcutt Nakamura

Alice Orcutt Nakamura

University of Alberta - School of Business

W. Erwin Diewert

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

John Greenlees

Bureau of Labor Statistics

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Marshall B. Reinsdorf

U.S. Department of Commerce - Bureau of Economic Analysis (BEA)

Date Written: March 29, 2014

Abstract

We define a class of bias problems that arise when purchasers shift their expenditures among sellers charging different prices for units of precisely defined and interchangeable product items that are nevertheless regarded as different for the purposes of price measurement. For business-to-business transactions, these shifts can cause sourcing substitution bias in the Producer Price Index (PPI) and the Import Price Index (MPI), as well as potentially in the proposed new true Input Price Index (IPI). Similarly, when consumers shift their expenditures for the same products temporally to take advantage of promotional sales or among retailers charging different per unit prices, this can cause a promotions bias problem in the Consumer Price Index (CPI) or a CPI outlet substitution bias. We recommend alternatives to conventional price indexes that make use of unit values over precisely defined and interchangeable product items. We argue that our proposed ideal target indexes could greatly reduce these biases and make use of increasingly available electronic scanner data on prices and quantities. We also address the challenges national statistics agencies must surmount to produce price index measures more like the specified target ones.

Keywords: Outlet Substitution, Bias In Price Indexes, Offshoring, Outsourcing, GDP Bias, Import Price Index, Producer Price Index, Intermediate Input

JEL Classification: C43, C67, C82, D24, D57, E31, F1,

Suggested Citation

Nakamura, Alice Orcutt and Diewert, W. Erwin and Greenlees, John and Nakamura, Leonard I. and Reinsdorf, Marshall B., Sourcing Substitution and Related Price Index Biases (March 29, 2014). FRB of Philadelphia Working Paper No. 14-34, Available at SSRN: https://ssrn.com/abstract=2524022 or http://dx.doi.org/10.2139/ssrn.2524022

Alice Orcutt Nakamura (Contact Author)

University of Alberta - School of Business ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

W. Erwin Diewert

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604-822-2544 (Phone)
604-822-5915 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John Greenlees

Bureau of Labor Statistics ( email )

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

Marshall B. Reinsdorf

U.S. Department of Commerce - Bureau of Economic Analysis (BEA) ( email )

1441 L Street NW
Washington, DC 20910
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
658
PlumX Metrics