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. 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. external factors such as if the neighborhood has a high crime rate and/or is accessible to schools and a downtown area, the level of water and air pollution, or the value of other homes close by).The term “hedonics” is derived from ancient Greek and basically means “pleasure doctrine”. internal factors like its size, appearance, features like solar panels or state-of-the-art faucet fixtures, and condition), as well as characteristics of its surrounding environment (i.e. The most common example of the hedonic pricing method is in the real estate market, wherein the price of a building or piece of land is determined by the characteristics of both the property itself (i.e. Hedonic pricing captures a consumer’s willingness to pay for what they perceive are environmental differences that add or detract from the intrinsic value of an asset or property.Hedonic pricing is most often seen in the housing market, since real estate prices are determined by the characteristics of the property itself as well as the neighborhood or environment within which it exists.Hedonic pricing identifies the internal and external factors and characteristics that affect an item’s price in the market.
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