![]() Put simply, the lower bound problem says that quality improvements do not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available. Today I want to discuss one unresolved issue surrounding the interpretation of hedonic price indexes – the lower bound problem. Property research firm Rismark utilises the housing sales and information database compiled by RPdata to publish hedonic home price indexes. The ABS also adjusts for quality change in other price index data in the CPI, and plans to release more information about those adjustments following the 16th review of the CPI. Prior to this time the ABS simply used the US hedonic computing price index and with an exchange rate adjustment ( here). For instance, a hedonic price index for personal computers was introduced into the ABS Producer Price Indexes in 2003 and into the Consumer Price Index and the National Accounts (to create the price deflator for household final consumption expenditure) in 2005. This is usually done by making adjustments for quality in the price index to create a hedonic, or quality-adjusted, price index.ĭespite many unresolved issues surrounding the methods and interpretation of hedonic price indexes, they are becoming more widespread due to decreasing costs of data collection. One problem faced when constructing a price index is dealing with changes in quality. But we don’t live in that world, and we muddle our way through doing our best to measure price changes in the broadest sense. In an ideal world a selection of price indexes would be easily constructed and highly reflective of economic reality.
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