PRICE‐QUALITY RELATIONSHIPS IN A DURABLE ASSET: ESTIMATION OF A CONSTANT QUALITY PRICE INDEX FOR NEW FARM TRACTORS, 1948–1965*, †

Abstract

Because of the many uses of price indices it is important that they be corrected for quality change. This paper presents a regression approach to the problem of extracting the influences of quality change on price and a price index for new farm tractors is calculated which allows for the considerable, post‐war, quality improvements in the input. The results indicate that whilst the average price of tractors has risen rapidly over the post‐war period, the true (constant quality) price has shown only a small increase. Some implications of these results are put forward—particularly with regard to the measurement of gross investment and capital stock, and to the importance of input quality change in explaining increasing agricultural productivity over time. Finally, firm level decision making leads to the observed changes over time in the quality demanded of an input: some consideration is given to the place of factor quality selection in firm theory.

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