Lower import prices = 100% welfare gains? Not necessarily: don′t forget the impact of consumer taste and product quality
Konstantins Benkovskis, Julia Woerz15 July 2014
Import price statistics may not be a reliable indicator of welfare gains. They must adequately reflect the fact that consumers value variety, and that consumer tastes and product quality change over time. This column evaluates existing findings, and introduces new results for the four largest EU economies – including evidence of higher consumer welfare gains than suggested by official import prices for the period from 1995 to 2012.
Gregory Corcos, Massimo Del Gatto, Giordano Mion, Gianmarco I.P. Ottaviano
Official price statistics, which mostly reflect price surveys of importers, rely on the so-called overlap method to adjust price observations for changing product baskets. The implicit assumption is that price differences between old and new products entirely reflect differences in quality. Many problems remain: officially reported import prices, even when adjusted for quality, measure changes in the price for one unit of a product, while welfare analysis looks into the price per unit of unobserved utility.
As a measure of economic activity, GDP is imperfect, but no more so than any single indicator of the whole economy. Yet public policy debate about the economy is often focused on GDP growth to the exclusion of other important considerations. This Vox Talk argues the case for a ‘dashboard’ of alternative indicators that, in addition to measuring economic activity, could also capture social welfare, sustainability and the benefits of innovation.
Criticism of Gross Domestic Product (GDP) as an indicator of the health of the economy has grown in recent years, in part because of a new focus on measures of subjective well-being or ‘happiness’. This column argues that the debate needs to distinguish between the different purposes of measurement: economic activity, social welfare, and sustainability are distinct concepts and cannot be captured by a single indicator. There are good arguments for paying less attention to GDP and more to indicators of welfare and sustainability, but it would be a mistake to adjust or replace GDP.
The debate about how best to measure economic activity dates back to well before the ‘invention’ of GDP by Richard Stone and others during the Second World War (Stone 1947). The earliest attempt was William Petty’s 1665 estimate of income and expenditure in England and Wales, followed by a variety of other approaches in the 18th and 19th centuries. By the 1930s, partly in response to the demand from policymakers for a better handle on what was happening in the economy, the current approach to national income was taking shape (Coyle 2014).