Product Creation and Destruction: Evidence and Price Implications

Christian Broda and David Weinstein

No 13041, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper describes the extent and cyclicality of product creation and destruction in a large sector of the U.S. economy and quantifies its implications for the measurement of consumer prices. We find four times more entry and exit in product markets than is typically found in labor markets because most product turnover happens within the boundaries of the firm. Net product creation is strongly pro-cyclical, but contrary to the behavior of labor flows, it is primarily driven by creation rather than destruction. High rates of innovation are also accompanied by substantial price volatility of products. These facts suggest that the CPI deviates from a true cost-of-living index in three important dimensions. The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated by official statistics; and finally, sampling error is sufficiently large that over the last 10 years policymakers could not statistically distinguish whether quarterly inflation was accelerating or decelerating 65 percent of the time.

JEL-codes: E21 E31 E32 (search for similar items in EconPapers)
Date: 2007-04
New Economics Papers: this item is included in nep-ino, nep-mac and nep-tid
Note: EFG ITI ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Published as Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.

Downloads: (external link)
http://www.nber.org/papers/w13041.pdf (application/pdf)

Related works:
Journal Article: Product Creation and Destruction: Evidence and Price Implications (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13041

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13041

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().