#Hedonic regression how to
#Hedonic regression tv

It is a poor justification of this ill-thought idea that what is wanted is merely to measure changes in the purchasing power of money.” 3

“All methods suggested for a measurement of the changes in the monetary unit’s purchasing power are more or less unwittingly founded on the illusory image of an eternal and immutable being who determines by the application of an immutable standard the quantity of satisfaction which a unit of money conveys to him. Ludwig von Mises observed this problem long ago: Whatever the type of regression that gets applied in order to calculate the “true price”, first of all an official from the BLS must determine whether a certain feature constitutes a quality change or not. For this purpose they run a so-called hedonic regression through their computers. Quality, so the BLS determined, has many aspects. Depending on what the expert decides, the overall product receives a new price from the BLS that is different from the market price of the product. This improvement then gets compared with a reference element of the product, as it was earlier on the market.

#Hedonic regression how to

While the BLS avoids claiming to know exactly how to calculate the pleasure that the whole product renders, the Bureau maintains that it is in a position to determine whether the electrical generator in the fridge has improved or not.

#Hedonic regression tv

Contrary to the act of use and consumption by the individual and contrary to the fact that one normally buys the whole product and not only a few parts, the BLS calculates price changes on the basis that the refrigerator or a certain TV set or a CD player consist of various different parts or product features. Before determining its inflationary or deflationary price change, there must be a BLS official who has to ponder the problem of whether this new or modified good or service really provides more or less “pleasure” to the user than the chosen reference product.Ī product, like a refrigerator, for example, is not just a refrigerator in the view of the BLS. Not any new gadget can go through as an improvement of the product. With hedonics, the BLS wants to introduce more “objectivity” into the calculation of price changes, but it needs a human being to determine quality in the first place. The BLS felt compelled to incorporate “quality changes” into its calculation of the price statistics in the second half of the 1990s when many new and modified goods and services appeared on the market and studies were launched that suggested that the conventional statistics overestimates the “true inflation rate.' 2 Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations. Likewise, given a constant labor input, productivity will increase. With a lower inflation rate, the transformation of nominal gross domestic product (GDP) into real GDP will render a higher result.

This way, a product may be on the market at a higher price, but when the product qualities have augmented more than the price in the eyes of the BLS, it will calculate that the price of this product has actually fallen.Īpplying the hedonic technique to a host of goods and services means that even when prices were generally rising, but product improvement are deemed to be larger than the price increases, the calculated inflation rate will fall. 1 The idea behind hedonic price index calculation is to incorporate quality changes into prices. It is also the doctrine which the Bureau of Labor Statistics (BLS) applies when calculating the price indices and for the computation of the real gross domestic product and of productivity. The term “hedonics” is derived from ancient Greek and basically means “pleasure doctrine”.