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

Measuring the Cost of Living - The Impact of Technology on our regular of LivingMea positive(predicate)s of the cost of living, like the retail legal injury index (RPI), ar inadequate, conking to reflect fully the impact of technological advances on our tired of living. This leads to a substantial upward bias in our estimates of inflation, perhaps as often as 1.6% a year. That is the contention of Professor William Nordhaus of Yale University. If he is right, therefore we may have to rewrite historyl Increases in the price of lighting services since 1830 may have been oerestimatedby as much as a thousandfoldl US real wage egression between 1959-95, presently measured at a very minor(ip) 10%,should be revised to a healthier 70%.l And estimated average annual rates of US productivity growth of 0.6% between1973-95 should nearly be tripled.Nordhaus notes that consumer price indices like the RPI are some of the to the highest degree importantmeasurements generated by economis ts and statisticians. Ideally, they are designed tomeasure the cost of attaining a given level of economic well-being. In practice, statisticians take a basket 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 considerable range of inflation-indexed state payments and benefits, as well as setting the footing for pay settlements. It is also crucial for measuring the real growth of the economy, 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 wages is currentlymeasured at a very modest 10% it should be revised to a healthier 70%. Estimates ofproductivity growth over the period 1973-95 indi cate 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 need to manifestation again at the way it is calculated in the UK, claims Professor Huw Dixon of the University of York and CEPR. Since so much depends on theinflation rate measure, we need to make sure we are getting it right.Note Traditional Productivity Estimates are Asleep at the Technological Switch byWilliam B. Nordhaus is published in the Controversy section of the Autumn 1997 issue ofthe Economic Journal. Nordhaus is Professor of economics at Yale University.