TY  - JOUR
AU  - Broda,Christian
AU  - Weinstein,David E.
TI  - Product Creation and Destruction: Evidence and Price Implications
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13041
PY  - 2007
Y2  - April 2007
UR  - http://www.nber.org/papers/w13041
L1  - http://www.nber.org/papers/w13041.pdf
N1  - Author contact info:
Christian Broda
Duquesne Capital Management
40W 57th 
Floor 24th
Floor 24th
New York, NY 10019
Tel: 917-214-0301
E-Mail: broda@duquesne.com

David Weinstein
Columbia University, Department of Economics
420 W. 118th Street
MC 3308
New York, NY  10027
Tel: 212/854-6880
Fax: 212/854-8059
E-Mail: dew35@columbia.edu
AB  - 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 The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated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.
ER  -