Globalization and Input Price IndexesBLSTAC meeting, June 15 2012

Carol A. CorradoSenior Advisor and Research Director, The Conference BoardSenior Scholar, Georgetown University Center for Business and Public Policy

Topics for discussion

Input price indexes Issues raised by globalization Approaches

GDP and components of final demand Value added by industry

Ways forward for BLS

Input price indexes -- a purchaser perspective

Input price index vs output price index is an issue of perspective Perspective taken applies both to aggregation and data collection. Purchaser or producer/seller? Input price indexes take purchaser perspective.

Sometimes called a “buyers’ price index” Preferable name b/c avoids confusion with what national accountants call

an “input cost index”

Input price indexes – are price indexes for components of final demand

Each industry in the economy has both an input and output price index

“Industries” include what we usually think of as industries or sectors (manufacturing, services, etc) + “final demand” industries which includes the “import” industry

Price indexes for components of final demand are input price indexes The CPI is, in principle, an input or buyers’ price index Of course, the CPI collects prices from establishments, not directly from

buyers. Therefore it has to deal with issues such as “outlet substitution bias” to approach the ideal of being a buyers’ price index.

Issues raised by globalization: who are the purchasers?

Domestic producers purchasing intermediate goods and services, which requires Buyer price index for purchases of intermediate inputs (goods and

services), wherever produced

Domestic producers purchasing final goods and services, which requires Buyer price index for fixed asset purchases (investment), wherever

produced Buyer price index for purchases of imported goods and services, wherever

sourced

Each are needed to account fully for substitution between domestically-produced and foreign-supplied goods and services

Approaches

Y = C + I + G + (X-M)

Y = Σi (Salesi – Inputsi)

BLS proposes to develop a buyers’ price index for industry inputs to pin down real value added by industry more precisely

Approach is based on presumption that have prices for industry-level sales, and for X and M, but PPI for margin industries are for margins, not sales IPI for M has China problem

Ignores I To get headline GDP correct, a buyers price for investment goods also is

needed

Investment prices, wholesale sales, and ICT

BEA’s investment price indexes are an average of changes in PPIs and IPIs Byrne and Corrado found large differences (7 or so percentage points)

between a price index for communication equipment they developed from U.S. wholesale sales (wherever produced) data vs. the PPI

The classification system has not kept up with the globalization of value chains Some of the country’s most innovative companies (Apple, Cisco, Nvidia,

Qualcomm) are classified as “resellers of imported goods”. Yes, they are in wholesale trade!

Spotlight has been off the measurement of ICT for a while, even as advances continue. With the move to the “fabless” business model in ICT (underway since the late 1990s), a buyers price index for investment is even more critical.

Globalization and price indexes

Globalization creates a situation that blurs traditional industry distinctions 35 to 50 percent of the value of final goods production is services

Value chain is complex, with many stages R&D Designs and blueprints Supplies and components Logistics Marketing Management, operational and strategic

All of which are likely to be traded (Jensen 2012).

How should BLS prices keep up with globalization?

Input price index for industries Ambitious and comprehensive, focus on industry value added US industry input data are weak, however Margin industry problem – still requires a wholesale sales price index (i.e.,

sales prices of items, wherever produced) which doesn’t exist for most items

Input price index for investment Ignoring structures, confined to a narrow class of goods and services Could be approximated by a wholesale sales price index Focuses squarely on GDP

Input price index for imports Import prices still need to be on a wherever sourced basis

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