Globalization and Input Price Indexes BLSTAC meeting, June 15 2012

1. Globalization and Input Price IndexesBLSTAC meeting, June 15 2012 Carol A. Corrado Senior Advisor and Research Director, The Conference Board Senior Scholar, Georgetown University Center for Business and Public Policy

2. Topics for discussion • Input price indexes • Issues raised by globalization • Approaches • GDP and components of final demand • Value added by industry • Ways forward for BLS

3. Input price indexes-- a purchaser perspective • Input price index vs output price index is an issue of perspective • Perspective taken applies both to aggregation and data collection. • Purchaser or producer/seller? • Input price indexes take purchaser perspective. • Sometimes called a “buyers’ price index” • Preferable name b/c avoids confusion with what national accountants call an “input cost index”

4. Input price indexes – are price indexes for components of final demand • Each industry in the economy has both an input and output price index • “Industries” include what we usually think of as industries or sectors (manufacturing, services, etc) + “final demand” industries which includes the “import” industry • Price indexes for components of final demand are input price indexes • The CPI is, in principle, an input or buyers’ price index • Of course, the CPI collects prices from establishments, not directly from buyers. Therefore it has to deal with issues such as “outlet substitution bias” to approach the ideal of being a buyers’ price index.

5. Issues raised by globalization: who are the purchasers? • Domestic producers purchasing intermediate goods and services, which requires • Buyer price index for purchases of intermediate inputs (goods and services), wherever produced • Domestic producers purchasing final goods and services, which requires • Buyer price index for fixed asset purchases (investment), wherever produced • Buyer price index for purchases of imported goods and services, wherever sourced • Each are needed to account fully for substitution between domestically-produced and foreign-supplied goods and services

6. Approaches • Y = C + I + G + (X-M) • Y = Σi (Salesi – Inputsi) • BLS proposes to develop a buyers’ price index for industry inputs to pin down real value added by industry more precisely • Approach is based on presumption that have prices for industry-level sales, and for X and M, but • PPI for margin industries are for margins, not sales • IPI for M has China problem • Ignores I • To get headline GDP correct, a buyers price for investment goods also is needed

7. Investment prices, wholesale sales, and ICT • BEA’s investment price indexes are an average of changes in PPIs and IPIs • Byrne and Corrado found large differences (7 or so percentage points) between a price index for communication equipment they developed from U.S. wholesale sales (wherever produced) data vs. the PPI • The classification system has not kept up with the globalization of value chains • Some of the country’s most innovative companies (Apple, Cisco, Nvidia, Qualcomm) are classified as “resellers of imported goods”. Yes, they are in wholesale trade! • Spotlight has been off the measurement of ICT for a while, even as advances continue. With the move to the “fabless” business model in ICT (underway since the late 1990s), a buyers price index for investment is even more critical.

8. Globalization and price indexes • Globalization creates a situation that blurs traditional industry distinctions • 35 to 50 percent of the value of final goods production is services • Value chain is complex, with many stages • R&D • Designs and blueprints • Supplies and components • Logistics • Marketing • Management, operational and strategic • All of which are likely to be traded (Jensen 2012).

9. How should BLS prices keep up with globalization? • Input price index for industries • Ambitious and comprehensive, focus on industry value added • US industry input data are weak, however • Margin industry problem – still requires a wholesale sales price index (i.e., sales prices of items, wherever produced) which doesn’t exist for most items • Input price index for investment • Ignoring structures, confined to a narrow class of goods and services • Could be approximated by a wholesale sales price index • Focuses squarely on GDP • Input price index for imports • Import prices still need to be on a wherever sourced basis

10. Thank you!