Quality change and other influences on measures of export prices of manufactured goods

Abstract

Measures of long-term trends in world export prices for manufactured goods, and in the terms of trade between manufactured goods and primary products, are sensitive to many choices in methods for weighting indexes, base periods, and (most important) changes in quality. For example: 1) wieghting products by their importance in exports to developing countries, rather than by their importance in exports to all countries, reduces the estimated rate of increase in prices for manufactured goods by about 0.1 or 0.2 percentage points a year; 2) a shift in weights from those of an early year (1963) to those of a recent year (1986) reduces the rate of increase in prices by about a third of a percentage point a year; 3) export price indexes with weights of Japanese exports grow about 0.2 to 0.4 percentage points a year less than one weighted by the U.S. export composition, with the larger difference for indexes based on 1963 weights; 4) adjusting the price index for exports of machinery and transport equipment for quality changes not accounted for in the price indexes reduces the rate of increase for those products by about one percentage point a year, and that adjustment for only those products reduces the estimated rate of increase in prices for all manufactures by about half a percentage point a year. Conservative estimates of the bias in the most commonly used measure of export prices of manufactured products - the U.N. export unit value index for manufactures - suggest that this measure overstates the long-run rise in prices for manufactured goods by more than half a percentage point a year, probably one percentage point or more. If so, there has been no long-term trend toward the prices of manufactured goods rising faster that prices for primary products. However, no conceivable estimate of bias in measures of prices for manufactured goods would reverse the picture of declining relative prices for primary products in the 1980s.

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