Measuring the Cost of Living - The Impact of Technology on our Standard

Measuring the Cost of Living - The Impact of Technology on our Standard of LivingMeasures of the embody of living, like the retail price superpower (RPI), are short-staffed, failing to reflect fully the impact of technological advances on our standard of living. This leads to a substantial upward bias in our estimates of inflation, by chance as much as 1.6% a year. That is the contention of professor William Nordhaus of Yale University. If he is right, then we may have to rewrite historyl Increases in the price of lighting services since 1830 may have been overestimatedby as much as a thousandfoldl US real profit produce between 1959-95, currently measured at a rattling modest 10%,should be revised to a healthier 70%.l And estimated average annual rates of US productivity harvest-feast of 0.6% between1973-95 should intimately be tripled.Nordhaus notes that consumer price indices like the RPI are both(prenominal) of the most primary(prenominal)measurements generated by econ omists and statisticians. Ideally, they are designed tomeasure the cost of attaining a given level of economic well-being. In practice, statisticians take a field goal of goods, which represents the consumption patterns of the average consumer, and measure how the cost of this fixed basket changes over time.This statistic is used to define inflation, and hence determines changes in a wide range of inflation-indexed state payments and benefits, as well as desktop the background for pay settlements. It is also crucial for measuring the real developing of the deliverance, a key statistic in assessing the economic and political performance of the economy and government policies.Nordhaus argues that the current methods for measuring the cost of living are inadequateand fail to refl... ...s and output. Over the period 1959-95, the increase in real recompense is currentlymeasured at a very modest 10% it should be revised to a healthier 70%. Estimates ofproductivity growth over the pe riod 1973-95 indicate an average annual rate of 0.6% thisshould nearly be tripled.The fact that we may be getting such an important statistic as the RPI wrong by so muchindicates that we really quest to look again at the way it is calculated in the UK, claims prof Huw Dixon of the University of York and CEPR. Since so much depends on theinflation rate measure, we need to conduct sure we are getting it right.Note Traditional productivity Estimates are Asleep at the Technological Switch byWilliam B. Nordhaus is publish in the Controversy section of the Autumn 1997 issue ofthe Economic Journal. Nordhaus is Professor of Economics at Yale University.