Product creation and destruction
Subtitle: evidence and price implications
By: Christian Broda, David E. Weinstein.
Contributors: Weinstein, David E.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13041.; Working paper series (National Bureau of Economic Research) -- working paper no. 13041.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 41
Subjects: Product life cycle -- United States; Prices -- United States
Description: This paper describes the extent and cyclicality of product creation and destruction in a large sector of the U.S. economy and quantifies its implications for the measurement of consumer prices. We find four times more entry and exit in product markets than is typically found in labor markets because most product turnover happens within the boundaries of the firm. Net product creation is strongly pro-cyclical, but contrary to the behavior of labor flows, it is primarily driven by creation rather than destruction. High rates of innovation are also accompanied by substantial price volatility of products. These facts suggest that the CPI deviates from a true cost-of-living index in three important dimensions. The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated by official statistics; and finally, sampling error is sufficiently large that over the last 10 years policymakers could not statistically distinguish whether quarterly inflation was accelerating or decelerating 65 percent of the time.
Notes: "April 2007"

Includes bibliographical references (p. 39-41).

Also available in PDF from the NBER world wide web site (www.nber.org).