Creative destruction and economic growth
Aghion and al. develop a growth model with (exogenous) innovation which may either create new varieties or replace existing varieties with products of higher quality. The quality improvements can be performed by incumbents on their own products, or by competing incumbents and entrants (creative destruction). If the statistical office resorts to imputation due to creative destruction, then their model predicts:
First, missing growth from imputation is substantial: roughly one-half a percentage point per year, or around one-third of measured productivity growth. Second, we find only a modest acceleration of missing growth since 2005, an order of magnitude smaller than needed to explain the slowdown in measured growth.
Missing Growth from Creative Destruction
Authors: Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li
From: Federal Reserve Bank of San Francisco
Creative destruction and inflation
Changes in quality and the introduction of new goods introduce an upward bias to price indexes. In particular, CPI and the PCE (personal consumption expenditures) price index are subject to an estimated upward bias of 0.37 and 0.45 percentage points per year, respectively.
Using the conventional CPI, the Bureau of the Census reports average annual growth of 0.65 percent per year over the past two decades. That means incomes are doubling every 108 years. However, if the CPI overstates inflation by 0.8 percentage points per year, correctly measured real incomes are doubling once every 47 years—or more than twice as fast.
Inflation and Price Measurement: A Primer
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
