Macroeconomics: Hedonic Methods

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Price Check on Aisle 2

Macroeconomics

Dennis Cox- 090441

4/14/2011


We will begin by my reading notes of the hedonic method and finish with what I’ve learned about the subject. This seems to be a very interesting subject and has showed me that it is a very intense process. So here we go.

There are different forms to adjust the CPI, but the one that is preferred is the hedonic method. It relies on statistical techniques to estimate the implicit prices of product characteristics from observed prices and quantities sold in the market place. The implicit prices then are used as measures of value to the consumer’s products. This helps disaggregate the observed price difference between two products in quality and pure price change. Initially the hedonic method was estimated on the sample and provided structured criteria in the selecting of a suitable substitution in a disappearing product. If one jacket for instance was missing, a new jacket would have to be of the same fiber to be considered as a substitute. This procedure then advanced to using the hedonic regressions to provide estimates of quality change to the index. When the new jacket would be brought into the index, the price would be adjusted based on the co-efficiencies of the hedonic regressions in that category.

Hedonic methods are now being using for other categories such as personal computers, televisions, VCR’s, major appliances, and even college textbooks. Larger numbers are being recorded to expand the samples, and provide a larger database for hedonic regressions. At the most general level, the hedonics function describes observed market prices of heterogeneous goods, and the amount of characteristics these goods embody.

This far I’ve learned that the hedonic method is very useful tool in the CPI. It helps economists evaluate goods and see about pricing for the year. It looks like they use it to try to base it off of what was on the index for the base year. They take the method...
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