Errors of Measurement in Output Deflators

We investigate the incidence of measurement errors in two independent estimates of long-term price change, the producer price index (PPI) and the U.S. Bureau of the Census's unit value relative, within the framework of multiple-indicators models of price measurement. Our estimates of the measurement-error variances suggest that the PPI is a far more reliable indicator of long-term price change. We also assess the importance of the problem posed by quality change for price and productivity measurement. Apparently, less than half of quality change is adjusted for in the PPI, so conventional productivity statistics underestimate “quality-adjusted” productivity growth by 34%.