Comparing apples and oranges ...

The most comprehensive and often-cited statistic about the U.S. economy is gross domestic product (GDP), the sum of all goods and services produced in the United States. Estimates of GDP are the featured statistics in the National Income and Product Accounts, the construction of which involves the collection and aggregation of an immense amount of data. In the construction of real GDP, complicated issues arise when adding up quantities of vastly different types of goods and services. These problems, which lie at the heart of national income accounting, can be thought of in simple terms as a problem of comparing apples and oranges. A Florida frost that raises orange prices might result in higher expenditures on oranges, even though the number of oranges produced has fallen. A period of inflation might increase total spending on both apples and oranges, even if quantities are unchanged. To convert total dollar sales (nominal GDP) into a measure of the total quantity of fruit (real GDP), price indexes are used to adjust for price changes both across goods and over time. But what if the quality of some goods is changing over time? Consider a particular variety of apples for which quality change has been evident: the products of Apple Computer Inc. The iMac produced in 2002 is a far cry from the Apple II computer of the late 1970s. More generally, the quality of computers—in terms of speed, data storage capacity, etc.— has advanced dramatically in recent years. Indeed, the celebrated Moore's Law, proposing that microchip capacity doubles every 18 months, has held true since at least the mid-1970s. In an environment where technological progress gives rise to improvement in the quality of goods, particularly high-tech goods like computers, accurate measurement of economic output requires that both quantity and quality be considered. To address this problem, the Bureau of Economic Analysis (BEA) uses a technique known as hedonic regression to adjust sales of rapidly changing products like computers for improvements in quality.