New Goods As a Challenge for Index Number Making

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The basic technology for the making of price indexes is long established (for the early history, see Diewert 1993a) -so much so that many treat price index making as a purely mechanical exercise. This is despite the pervasive importance of price indexes in both real world economic affairs and economic research. Values of the Consumer Price Index (CPI) affect the determination of national monetary policies, the behaviour of financial investors, transfer payments to individuals, wage negotiations, and much more. The index number methods pioneered for consumer price index construction are used as well, in modified forms, for producing a variety of other price and quantity indexes. And price index values directly enter into the construction of measures of national output such as real GDP and measures of productivity for the Canadian economy. The underlying technology for the construction of price and quantity indexes makes use of price and quantity measurements over time for a basket of goods and services that is viewed conceptually as being in composition. This basket is supposed to be representative of the universe of goods and services covered by an index. So what about new goods? What are new goods, for a start? How can they be brought into a fixed basket? The questions considered in this note challenge the prevalent view that the important problems of index number making have all been solved. A longer companion paper considers these issues in greater depth, and documents the treatment of new goods in the producer price index systems of Canada and Japan (see Baldwin, Despres, Nakamura and Nakamura, 1996). Alternative definitions of new goods are considered in sections I and II. Sections III-V deal with the conceptual relationships of new goods, varieties of goods, and new processes for producing goods. Section VI concludes.